EA2 Study Unit 8.1-8.4 Questions PDF

EA2 Study Unit 08 - Credits, Losses, and Additional Taxes 7)Rob and George own an office building that was built 30 years ago. They opened a tax return business in 2022 and made numerous renovations during 2023 to the building to bring it into compliance with the Americans with Disabilities Act of...

EA2 Study Unit 08 - Credits, Losses, and Additional Taxes 7)Rob and George own an office building that was built 30 years ago. They opened a tax return business in 2022 and made numerous renovations during 2023 to the building to bring it into compliance with the Americans with Disabilities Act of 1990. They had gross receipts of \$750,000 dollars and 10 full-time employees during 2022. They spent \$15,000 in eligible access expenditures. What is the 2023 Disabled Access Credit? A.\$1,500 B.\$14,750 **C.\$5,000** **Answer (C) is correct.\ A credit for a portion of qualifying expenditures to provide access to disabled persons is available as a General Business Credit. The credit is equal to 50% of qualifying expenditures that fall between a \$250 threshold and a \$10,250 cap. The credit is limited to \$5,000 per year. Since the expenditures incurred in 2023 are greater than \$10,250, the credit is limited to \$5,000.** D.\$7,500 Answer (D) is incorrect.\ Although \$7,500 does equal 50% of the expenditures, it is greater than the \$5,000 maximum credit. === 9)Which of the following are wages for the purpose of the credit for qualified long-term family assistance recipients within the Work Opportunity Credit? 1. Remuneration for employment 2. Educational assistance 3. Dependent care expenses **A.I, II, and III.** **Answer (A) is correct.\ For purposes of the Work Opportunity Credit, wages include the following: remuneration for employment, amounts received under accident and health plans, contributions by employers to accident and health plans, educational assistance, and dependent care expenses.** B.III only. Answer (B) is incorrect.\ Dependent care expenses are not the only wages included for the purpose of the Work Opportunity Credit. C.I only. D.II and III. === 17)What is Sam's (a single taxpayer's) net operating loss for the current year based on the following information? Wages from a part-time job \$10,000 Interest on savings 500 Net long-term capital gain on sale of business asset 5,000 Net loss from business (gross income \$60,000 minus \$80,000 expenses) (20,000) Net short-term capital loss on stock sales (3,000) 2023 standard deduction 13,850 A.\$4,500 B.\$7,500 Answer (B) is incorrect.\ The effect of nonbusiness income of \$500 is canceled out by the nonbusiness deduction of \$13,850 (standard deduction), and the capital loss must be added back. In addition, the nonbusiness capital losses of \$3,000 must be deducted from the taxable loss. **C.\$5,000** **Answer (C) is correct.\ For 2023, Sam realized a \$20,000 net loss (GI of \$60,000 less expenses of \$80,000) from operating his business without regard to dispositions of property other than inventory. Other than this, the income tax return showed gross income of \$15,500 (\$10,000 of wages, \$500 interest on personal savings, and a \$5,000 long-term capital gain on business property). The excess of deductions over income was \$21,350 (\$15,500 gross income -- \$20,000 loss from business operations -- a \$3,000 nonbusiness short-term capital loss on the sale of stock -- \$13,850 standard deduction).** **To compute Sam's NOL, (1) the \$13,350 excess of nonbusiness deductions over nonbusiness income (\$13,850 standard deduction -- \$500 interest) is added and (2) the \$3,000 nonbusiness capital loss is added because there is no nonbusiness capital gain to offset it. Thus, Sam's NOL for the current tax year is \$(5,000) \[(\$21,350) negative taxable income + \$13,350 + \$3,000\]. NOTE: The capital gain on the business property is not offset by the nonbusiness capital loss or by nonbusiness deductions in computing the net operating loss.** D.\$21,350 === 19)Based on the following information, compute the 2023 net operating loss (NOL) that an individual can carry over to 2024. 2022 NOL \$(15,000) Wages 25,000 S corporation loss (40,000) Schedule C net profit 7,000 Interest income 500 Standard deduction 13,850 **A.\$8,000** **Answer (A) is correct.\ A net operating loss is defined as the excess of allowable deductions (as modified) over gross income. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness deductions in excess of nonbusiness income must be excluded. Interest and dividends are not business income.** **Wages \$25,000** **Schedule C net profit 7,000** **S corporation ordinary loss (40,000)** **Net operating loss \$ (8,000)** B.\$21,350 C.\$21,850 D.\$22,500 Answer (D) is incorrect.\ Nonbusiness income of \$500 and 2022 NOL are not included. === 20)Which of the following is *NOT a modification required to calculate an individual's net operating loss?* A.Add back a net operating loss deduction from any other year used in computing taxable income. Answer (A) is incorrect.\ Adding back a net operating loss deduction from any other year used in computing taxable income is a modification required to calculate an individual's net operating loss under Sec. 172(d). B.Add back excess nonbusiness capital losses over nonbusiness capital gains. **C.Add back all itemized deductions, except for casualty and theft losses, and state income tax on trade and business income.** **Answer (C) is correct.\ In computing a net operating loss, nonbusiness deductions are allowable to the extent of nonbusiness income \[Sec. 172(d)\]. Most itemized deductions are nonbusiness deductions. However, not all nonbusiness itemized deductions need be added back, only those in excess of nonbusiness income.** D.Add back the Qualified Business Income Deduction. === 21)Paula owns and operates a small flower shop that generated a \$5,000 loss in 2023. She sold some of the land she uses for the business at a \$2,000 gain and some stock she had inherited at a \$1,000 loss. She also earned \$1,225 from her part-time job as an usher at the local movie theater. Her bank personal savings account earned \$425 in interest in 2023. Paula files as single and claims the standard deduction. Her standard deduction amount for 2023 is \$13,850. Her net operating loss for 2023 is A.\$5,000 Answer (A) is incorrect.\ The \$5,000 loss is offset by the \$2,000 capital gain on the land used for business. In addition, the loss is reduced by the \$1,225 earned from her part-time job. **B.\$1,775** **Answer (B) is correct.\ A net operating loss is defined as the excess of allowable deductions (as modified) over gross income \[Sec. 172(c)\]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness income in excess of nonbusiness deductions must be included. Interest and dividends are not business income.** **Net loss from business \$(5,000)** **Net capital gain on business property 2,000** **Salary 1,225** **Net operating loss \$(1,775)** **The nonbusiness capital loss cannot be offset against the business-related capital gain. The nonbusiness deductions (the standard deduction) exceed the nonbusiness income (interest), and both items are excluded from the NOL calculation.** C.\$15,625 D.\$2,350 === 24)Taxpayer Q files the 2023 Form 1040 as a single taxpayer. The return includes the following information: Income: Net long-term capital gain on sale of investment \$ 3,500 Net short-term capital gain on sale of stock 2,500 Dividend income 1,000 Wages 2,000 Deductions: Standard deduction \$13,850 Net business loss 14,000 Q is projecting to have taxable income of \$14,000 in the upcoming year. Assuming this is true, ****what portion of Q's 2023 net operating loss (NOL) carryforward may be used in 2024?**** A.\$9,600 B.\$12,000 Answer (B) is incorrect.\ The entire NOL carryforward cannot be taken in 2024. The \$12,000 NOL is limited to 80% of 2024 taxable income. **C.\$11,200** **Answer (C) is correct.\ An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. The \$2,000 in wages is the only business income. Thus, Q has a 2023 NOL of \$12,000 (\$14,000 net business loss -- \$2,000 of wages). However, for NOLs that arise in 2021 and later, the carryover is limited to 80% of the taxable income for the year it is carried to, so the allowed carryover from 2023 that is used in 2024 is only \$11,200 (\$14,000 2023 taxable income × 80%).** D.\$18,850 === 1)In 2023, Rhonda, who is single, started a leasing business. Her 2023 income tax return reflected the following income and deductions: Income: Wages from part-time job \$5,000 Interest income 500 Net short-term capital gain (business) 1,000 Dividends received 750 Total income \$7,250 Deductions: Net loss from business \$12,000 Net long-term capital loss on sale of stock 500 Standard deduction 13,850 Loss on small business stock 2,000 Total deductions \$28,350 Using the above facts, what is the amount of Rhonda's net operating loss for 2023?A.\$8,500 B.\$21,100 C.\$7,250 Answer (C) is incorrect.\ Dividends received are not included in the NOL calculation. **D.\$8,000** **Answer (D) is correct.\ A net operating loss is defined as the excess of allowable deductions (as modified) over gross income \[Sec. 172(c)\]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness income in excess of nonbusiness deductions must be included. Interest and dividends are not business income. The loss on small business stock is a business loss (Sec. 1244).** **Net loss from business \$(12,000)** **Loss on small business stock (2,000)** **Net capital gain on business property 1,000** **Wages from part-time job 5,000** **Net operating loss \$ (8,000)** **The nonbusiness capital loss cannot be offset against the business-related capital gain. The nonbusiness deductions (the standard deduction) exceed the nonbusiness income (interest), and both items are excluded from the NOL calculation.** === 2)Which one of the following is **deductible** in computing a net operating loss for an individual taxpayer? **A.Loss on disposition of rental property.** **Answer (A) is correct.\ A loss on the disposition of rental property is allowed in computing NOL under Sec. 172.** B.NOL carryovers from other years. C.Business capital losses in excess of business capital gains. Answer (C) is incorrect.\ Business capital losses in excess of business capital gains are nondeductible in computing an NOL under Sec. 172(d). These and other items must be added back to the individual taxpayer's loss as modifications in computing an NOL. D.Nonbusiness deductions in excess of nonbusiness income. === 4)Which of the following types of entities is entitled to the net operating loss deduction?  A. Not-for-profit organizations without unrelated business taxable income (UBTI). B. S corporations. Answer (B) is incorrect.\ Individual investors of an S corporation are allowed an NOL deduction (not the S corporation). C.Partnerships. **D.Trusts and estates.** **Answer (D) is correct.\ Under Sec. 172, most taxpayers are allowed to carry over NOLs from a trade or business as a deduction against income. Exceptions to the general availability of the deduction include regulated investment companies, life insurance companies, partnerships (not partners), and S corporations (not investors). In general, exempt organizations do not have taxable income, therefore they have no deduction. Trusts and estates are not excluded from the allowable NOL deduction.** === 10)Tom Thumb owned a greenhouse that was built on leased land. He used the greenhouse one-half for business and one-half for personal uses. In 2023, the greenhouse was totally destroyed by a hurricane and was in a federally declared disaster area. The greenhouse cost \$500,000 to build, had a fair market value of \$300,000, and had accumulated depreciation of \$50,000 when it was destroyed. Tom received \$250,000 from his insurance company in 2023 to reimburse him for the loss. Tom's adjusted gross income for 2023 is \$54,000. The personal loss is subject to a \$100 per casualty deductible and 10% of adjusted gross income limitation. ****What is the amount of Tom's deductible loss on the greenhouse for 2023?**** A.\$150,000 B.\$25,000  **C.\$94,500** **Answer (C) is correct.\ Tom may deduct a limited amount of the loss that is attributable to the personal portion of the greenhouse. When property is used for both business and personal uses, the deduction must be figured separately for each type of use. When figuring the loss, you must allocate the total cost or basis, the FMV before and after the casualty or loss, and the insurance proceeds between the business and personal use of the property. In addition, when business property is totally destroyed, the business portion of the loss is determined by subtracting any salvage value and insurance proceeds from the adjusted basis. Since he used the greenhouse for 50% business and 50% personal purposes, the cost, depreciation, and insurance proceeds must be split in the same way.** **Business Part Personal Part** **1. Cost (total \$500,000) \$250,000 \$250,000** **2. Subtract depreciation 50,000 0** **3. Adjusted basis \$200,000 \$250,000** **4. FMV before hurricane (\$300,000) \$150,000 \$150,000** **5.FMV after hurricane (\$0) 0 0** **6. Decrease in FMV \$150,000 \$150,000** **7. Loss (smaller of line 3 or line 6)\* \$200,000 \$150,000** **8. Subtract insurance 125,000 125,000** **9. Loss after reimbursement \$  75,000 \$  25,000** **10. Subtract \$100 on personal-use property 0 100** **11. Loss after \$100 rule \$  75,000 \$  24,900** **12. Subtract 10% of \$54,000 gross income 0 5,400** **13. Deductible business loss \$  75,000** **14.Deductible personal loss \$  19,500** **\*NOTE: On line 7, "smaller of line 3 or line 6" is referring only to the personal part. For business property that is totally destroyed, the loss is always the adjusted basis.** D.\$144,500 Answer (D) is incorrect.\ The decrease in the FMV for the personal use of the property minus the 10% of AGI is \$144,500, but the insurance proceeds must be subtracted from it, in addition to the \$100. Further, it does not account for the business use of the property. === 12)Dawson's office was flooded in the current year when an upriver dam broke. The office furniture had been purchased in the previous year at a total cost of \$6,000, and Dawson had claimed \$1,500 in depreciation before the flood. The fair market value of the furniture before the flood was \$5,000 and after the flood was \$1,000. Dawson was reimbursed \$2,000 by insurance. Dawson's casualty loss was **A.\$2,000** **Answer (A) is correct.\ Section 165 allows a deduction for a loss sustained during the taxable year and not compensated for by insurance. The amount of the loss for partial destruction of business property** ****is the lesser of the taxpayer's adjusted basis in the property or the difference between the fair market value of the property immediately before and immediately after the casualty.**** **Dawson's adjusted basis in the property was \$4,500 (original cost of \$6,000 -- \$1,500 in depreciation), while the reduction in the fair market value of the property due to the flood was \$4,000. Therefore, Dawson's deductible loss is \$2,000 (\$4,000 reduction in the property's fair market value -- \$2,000 insurance reimbursement).** B.\$2,500 Answer (B) is incorrect.\ The reduction in fair market value is less than the adjusted basis of the property. C.\$4,000 D.\$3,000 === 17)For a tax period beginning July 1, a truck with taxable gross weight of 60,000 lbs., registered to Mason Corp., was first used on a public highway on July 10. On December 10, the truck was sold to Mr. Diaz, who registered and used it in the tax period. The total federal highway use tax for the period was \$232. Which of the following statements ****is false**** in respect to who is liable for the tax? **A.Mr. Diaz is the only one of the two owners during the tax period with any liability for the tax due from December through June.** **Answer (A) is correct.\ If a heavy vehicle is purchased from another registered owner, the first owner (Mason) owes the tax for the tax period the vehicle is used. However, if the first owner owed the tax but did not pay it, the second owner (Diaz) is liable for the tax if it is used during the period that unpaid tax is due.** B.Mr. Diaz is liable for the full tax of \$232 to the extent Mason has not paid the tax. C.Mason Corp. is liable for the full tax of \$232 since it first placed the truck in service. Answer (C) is incorrect.\ The first owner owes the tax for the whole tax period the vehicle is used. D.To the extent that either Mason or Mr. Diaz pays the \$232, the other party is relieved, although the truck changed ownership. === 19)With regard to the employment tax responsibilities of farmers, which of the following statements **is false?** A.Social Security and Medicare do not cover the services of a child under the age of 18 who works for his or her parent in a trade or business. **B.A farmer-employer must pay federal unemployment tax if (s)he paid cash wages of \$20,000 or more to farm workers during the current or preceding calendar year.** **Answer (B) is correct.\ A farmer must pay federal unemployment tax if either cash wages of \$20,000 or more are paid to farm workers in any calendar quarter during the current or preceding year or 10 or more farm workers are employed for at least 1 day during each of 20 different calendar weeks during the current or preceding calendar year.** C.A farmer-employer must pay federal unemployment tax if (s)he employed 10 or more farm workers for some part of at least 1 day during any 20 different calendar weeks during the current or preceding calendar year. D.Cash wages, but not noncash wages, such as room and board, paid to farm workers may be subject to Social Security and Medicare taxes. Answer (D) is incorrect.\ *Cash wages, but not noncash wages, such as room and board, paid to farm workers may be subject to Social Security and Medicare taxes and Federal withholding if either (1) cash of \$150 or more is paid in a year to the employee, or (2) the total paid for farmwork (cash and non-cash) to all employees is \$2,500 or more during the year (Publication 51).* === 23)For the current year, Mr. K, a farmer-employer, will have to pay Social Security taxes on which of the following? A.100 bushels of soybeans with a fair market value of \$600 given to an unrelated person by Mr. K in lieu of wages. Answer (A) is incorrect.\ Wages subject to FICA tax do not include compensation paid in forms other than cash for agricultural labor. B.\$100 cash wages paid to Mr. K's wife. Total cash wages paid to all employees is \$1,300. **C.\$800 cash wages paid to Mr. K's father.** **Answer (C) is correct.\ The Social Security taxes are imposed by Secs. 3101 and 3111 on wages paid by an employer. Wages are defined in Sec. 3121(a) as all remuneration for employment, not including that paid for agricultural labor unless the cash remuneration in the year is \$150 or more to the employee, or the employer pays at least \$2,500 during the year for all agricultural labor \[Sec. 3121(a)(8)\]. Mr. K's father earned more than \$150, and his wages therefore qualify under the definition of wages. Employment for FICA purposes includes that of a parent by a child.** D.\$400 cash wages paid to Mr. K's 17-year-old son. ===