1. If the accumulation of home office expenses for the business use of a home results in a net loss for the year, the expense that is the last deduction taken and thus the first expense postponed to the next year is: a. mortgage interest. b. property taxes. c. depreciation. d. utilities. e. none of the above. 2. Which of the following income items is treated as earnings from self-employment? a. Capital gain from the sale of an investment b. Dividends c. Compensation received by a registered nurse who is hired by a patient to provide private nursing services d. Compensation received by a babysitter who provides child care in the parents home e. All of the above are earnings from self-employment 3. A cash-basis sole proprietor had the following cash receipts and disbursement for the year: Net sales $80,000 Cost of goods sold 40,000 Operating expenses 20,000 Employee payroll taxes 3,000 Dividend income 900 Interest income from a personal savings account 200 What is the amount of reported net profit reported on Schedule C? a. $20,000 b. $40,000 c. $17,000 d. $15,000 e. $18,000 4. The maximum amount that an employer can deduct as a gift to an employee for 30 years of service is: a. $0. b. $250. c. $400. d. $500. e. $1,000. 5. A taxpayer buys tickets to an event that she attends with her client. Which of the following statements is true? a. The taxpayer can deduct 50% of the costs of the tickets as entertainment expense. b. The taxpayer can deduct up to $25 of the costs of the tickets as a gift. c. The taxpayer can deduct 100% of the cost of the tickets as a gift. d. The taxpayer can deduct up to 50% of the cost of the tickets as a gift. e. Either a. or b. CHAPTER 8 6. A taxpayer places in service $600,000 of personal property in 2012. The maximum Section 179 the taxpayer can elect in 2012 is: a. $0. b. $124,000. c. $600,000. d. $560,000. e. $99,000 7. Residential realty costing $100,000 is placed in service in 2000. MACRS for 2012 is: a. $2,500. b. $2,564. c. $3,175. d. $3,636. e. $14,286. 8. What is the designated recovery period in years for furniture, fixtures, and equipment under the Alternative Depreciation System? a. 5 b. 7 c. 10 d. 12 e. None of the above 9. What is the maximum depreciation in 2012 for a new computer used 80% for business that was acquired on July 2, 2012, for $3,000? Assume Section 179 is not elected and that this is the only property placed in service during 2012. a. $2,400 b. $1,200 c. $480 d. $1,800 e. $1,440 10. The MACRS basis of 5-year property acquired on March 3, 20X1 is $10,000. No Section 179 or bonus depreciation is taken on the property. The property is sold on November 4, 20X2. If the half-year convention applies to personal property acquired in 20X1 and regular (accelerated) MACRS is used, depreciation expense for 20X2 is: a. $2,000. b. $1,000. c. $1,600. d. $3,200. e. $2,800. CHAPTER 9 11. In December 2012, a taxpayer leased out property for three years, receiving $600 for the December rent and $600 for Januarys rent. A refundable security deposit of $500 was also received. How much rental income should be reported in 2012? a. $600 b. $1,100 c. $1,200 d. $1,700 e. None of the above. 12. Which of the following expenditures incurred on an apartment building is not treated as an improvement? a. Replacing broken windows b. Installation of a new roof c. Paving a driveway d. Replacing the kitchen cabinets e. All of the above are treated as improvements 13. Which of the following is not considered in computing the taxpayers amount at-risk with respect to a particular activity? a. Money contributed to the activity b. Adjusted basis of property contributed to the activity c. Amounts borrowed where the taxpayer is personally liable d. Loans where the property is used as collateral for the loan e. All of the above qualify as amounts at-risk 14. Which of the following accommodations must be present before property can be considered a dwelling unit? a. A kitchen b. Sleeping quarters c. Toilet facilities d. All of the above must be present in order to provide the basic living accommodations e. None of the above must be present in order to provide the basic living accommodations 15. The owner of rental property personally uses it 28 days during the year. Th e home is advertised for rent during the entire year, but sat unused for 250 days during the year. It was used the rest of the year by the following persons: The taxpayers best friend, who pays fair rental, 5 days The taxpayers son and his family, who pay fair rental, 10 days Unrelated parties who pay fair rental, 60 days The taxpayers parents, who pay no rent, 12 days The numerator in the fraction that allocates expenses between rental and personal use and the number of personal days used in determining whether the vacation home rules apply are: a. 65 days at fair rental, 50 personal days b. 325 days at fair rental, 40 personal days c. 315 days at fair rental, 50 personal days d. 75 days at fair rental, 40 personal days e. None of the above CHAPTER 10 16. Patty converted her principal residence to rental property two years ago when it was worth $70,000. Patty paid $85,000 for the house. What is Pattys basis in the house if after taking $10,000 of depreciation deductions she sells it for $66,000? a. $60,000 b. $66,000 c. $70,000 d. $75,000 e. $85,000 17. Barbara sold 100 shares of STP Company stock to her daughter, Doris, for $7,000. Th e stock originally cost Barbara $10,000. Doris later sells the stock on the open market for $8,000. Doris recognizes: a. no gain or loss. b. a $1,000 gain. c. a $2,000 gain. d. a $3,000 loss. e. a $2,000 loss. 18. Mr. and Mrs. Axelson sold their personal residence in January 2012 for $325,000. Selling expenses were $20,000. The Axelsons purchased the house 30 years ago for $40,000. Th e gain reported on the Axelsons tax return is: a. $0. b. $15,000. c. $35,000 d. $265,000. e. none of the above. 19. A warehouse was damaged in a storm. The warehouse was worth $225,000 before the casualty and $65,000 after the casualty. The taxpayers adjusted basis in the warehouse was $77,000. The insurance company reimbursed the taxpayer $150,000 for its loss. To avoid paying tax on the realized gain, how much must the taxpayer reinvest and in what type of property? a. $77,000 in another warehouse b. $150,000 in any other business or investment realty c. $77,000 in any other business or investment realty d. $160,00 in another warehouse e. None of the above. 20. Several years ago, Jan paid $25,000 for 1,000 shares of stock in ABC. During the current year ABC declares a two-for-one stock split. Shortly thereafter, Jan sells 500 shares of ABC stock for $18,000. Her recognized gain on the sale of the 500 shares is: a. $0. b. $11,750. c. $5,500. d. $9,000. e. $7,500. CHAPTER 11 (EXTRA CREDIT) 21. Which of the following properties is not a capital asset? a. Taxpayers personal residence b. Computer used in taxpayers business c. Corporate stocks owned by an investor d. Business suits worn by taxpayer e. All of the above are capital assets 22. If certain conditions are met, which of the following properties could be classifi ed as Section 1231 property? a. Stock b. Inventory c. Accounts receivable d. Computer e. None of the above 23. If certain conditions are met, which of the following properties could be subject to Section 1245 depreciation recapture? a. Land b. Delivery truck c. Apartment building d. Inventory e. None of the above 24. Which of the following is not an example of carryover basis property? a. A like-kind exchange b. Property acquired from a spouse c. A taxable stock dividend d. A stock split e. All of the above are examples of carryover basis property 25. A married couple sells the following capital assets during the year. Property Date Acquired Date Sold Sales Price Adjusted Basis 1 8/4/11 6/6/12 $15,000 $16,000 2 1/8/10 1/15/12 28,000 17,000 3 8/9/11 9/8/12 2,000 8,000 The couples net capital gain is: a. $4,000. b. $12,000. c. $5,000. d. $11,000. e. None of the above TRUE/FALSE QUESTIONS CHAPTER 7: 1. Businesses that sell services rather than goods frequently use the cash method of accounting for tax purposes. 2. Cash method taxpayers who prepay expenses to be incurred in a subsequent tax year are allowed to deduct the expense in the year of payment. 3. The constructive receipt rule applies only to the cash method of accounting. 4. An accrual basis taxpayer in a qualified service business is required to accrue service revenue that has been earned but not yet collected, even if, based on experience, it is probably not collectible. 5. If the taxpayer uses the accrual method of accounting, receipt of a prepaid amount is taxable in the year received even though the services to which the amount was paid span more than one tax year. 6. Accounting for prepaid expenses by an accrual-method taxpayer is generally the same as accounting for them under the cash method. CHAPTER 8: 1. Section 179 expense is subtracted from the propertys basis before the MACRS depreciation is computed. 2. Any allowable depreciation not claimed in the applicable tax year, reduces the taxpayers basis of the property. 3. Under MACRS, the basis for depreciation of personal property is its cost less salvage value. 4. Listed property used 50% or less for business is still eligible for Section 179 expensing, provided the taxpayer is the original owner of the listed property. 5. The luxury automobile limits apply to automobiles used 100% for business. 6. For depreciable real property acquired and placed in service in 2012, the taxpayer may elect to depreciate the property over 40 years using the straight-line method. CHAPTER 9 1. Rent received in advance by an accrual-basis taxpayer must be recognized as income when received rather than prorated over the rental period involved. 2. Individual taxpayers deduct expenses related to a rental activity from gross income to arrive at AGI. 3. If a security deposit is to be used as a final payment of rent, the taxpayer includes it in income in the year of receipt. 4. Expenses paid by the tenant on behalf of the landlord must be included in the landlords income if the expense paid is substituted for rent. 5. An improvement is deductible as a rental expense if it relates to rental property. 6. If a dwelling unit used as a residence is rented for 12 days during the year, the expenses allocated to rental use may be deducted as rental expenses. CHAPTER 10 1. No taxable income results from a stock split. 2. A married couple can exclude up to $500,000 of the gain from the sale of a principal residence, provided certain conditions are met. 3. A taxpayer cannot recognize the loss on the sale of stock if the taxpayer purchases substantially identical stock within 60 days before or 60 days after the sale. 4. A loss incurred on the sale of a personal residence is not deductible. 5. When the buyer assumes the sellers liability, the seller includes this amount in computing the amount realized from the sale. 6. The donees basis in gifted property is the donors basis in the property