Deck 6: Accounting Periods and Other Taxes

Question 1

Dividend income is not subject to the self-employment tax.

Answer 1

True

Question 2

The hybrid method of accounting involves the use of both the accrual and cash methods of accounting.

Answer 2

True

Question 3

Salary earned by minors may be included on the parents' tax return.

Answer 3

False

Question 4

Annualizing" is a method by which the taxpayer can usually decrease the amount of tax he or she pays.

Question 5

Sales of property at a gain may be restricted under the related party rules of the Internal Revenue Code.

Question 6

Most partnerships, S corporations, and personal service corporations owned by individuals choose a September 30 year-end so that they may defer 3 months of income.

Question 7

All S corporations must use the accrual basis of accounting.

Question 8

In 2019, household employers are not required to pay FICA taxes on cash payments of less than $2,100 paid to any household employee in a calendar year.

Question 9

Sophia is 9 years-old and has $3,200 of interest income from a savings account in 2019. Sophia's parent claim her as a dependent and make no special elections with respect to Sophia's income. Sophia's income will be taxed at her parent's tax rate.

Question 10

Household employers are not required to pay FICA taxes on part-time household employees.

Question 11

Unearned income of a 16-year-old child may be taxed at trust and estate rates.

Question 12

There is a Medicare tax of 3.8 percent on net investment income.

Question 13

For purposes of the additional 0.9% Medicare tax on earned income, a single taxpayer having earned income of more than $200,000 is generally subject to the tax.

Question 14

In determining an employee's FICA tax to be withheld, the maximum amount of wages subject to FICA must be reduced by the taxpayer's self-employment earnings.

Question 15

If the net unearned income of a minor child is to be taxed at trust and estate rates, the parents may elect, under certain conditions, to include the child's gross income on their tax return.

Question 16

Under the cash basis of accounting, most expenses are generally deducted in the year they are paid.

Question 17

For 2019, the maximum base amount for computing the Medicare portion of the self-employment tax is $250,000.

Question 18

In general, accrual basis taxpayers recognize income when it is earned, regardless of when it is received.

Question 19

Generally, cash basis taxpayers must deduct payments of prepaid interest using the accrual method.

Question 20

Choose the incorrect statement.

A)Books and records may be kept on a different year-end basis than the year-end used for tax purposes.
B)The choice to file on a fiscal year-end basis must be made with an initial tax return.
C)Almost all individuals file tax returns using a calendar year accounting period.
D)An individual may request IRS approval to change to a fiscal year-end basis if certain conditions are met.

Question 21

Kate is an accrual basis, calendar-year taxpayer. On November 1, 2019, Kate leased out a building for $4,500 a month. On that day Kate received 7 months rental income on the building, a total of $31,500 ($4,500 × 7 months). How much income must Kate include on her 2019 tax return as a result of this transaction?

A)$4,500
B)$9,000
C)$31,500
D)$54,000
E)None of these

Question 22

Which of the following is not an adjustment or tax preference item for 2019 for purposes of the individual alternative minimum tax (AMT)?

A)State income tax refunds
B)Certain passive losses
C)Interest from private activity bonds
D)Cash charitable contributions
E)All of these are adjustment or tax preference items for AMT

Question 23

The Dot Corporation has changed its year-end from a calendar year-end to August 31. The income for its short period from January 1 to August 31 is $54,000. The tax for this short period is:

A)$2,040
B)$6,250
C)$8,667
D)$11,340

Question 24

Jerry and Julie are brother and sister. Jerry sold stock to Julie for $5,000, its fair market value. The stock cost Jerry $10,000 five years ago. Also, Jerry sold Carol (an unrelated party) stock for $2,000 that cost $10,000 three years ago. What is Jerry's recognized loss before the $3,000 capital loss limitation?

A)$0
B)$8,000
C)$5,000
D)$13,000
E)$14,000

Question 25

In 2019, which of the following children would have income taxed at trust and estate rates?

A)A 13-year-old child with salary income of $12,000
B)A 12-year-old child with net unearned income of $3,200
C)A nonstudent, 19-year-old child with net unearned income of $12,000
D)A 9-year-old child with salary income of $1,000
E)All of these

Question 26

William, a cash-basis sole proprietor, had the following receipts and disbursements for the current year: $$\begin{array} { l r } \text { Gross receipts } & \$ 50,000 \\\text { Cost of sal es } & 30,000 \\\text { Other operating expenses } & 5,000 \\\text { Personal medical expenses } & 600\end{array}$$ For the current year, what amount should William report as net earnings from self-employment?

A)$13,400
B)$14,000
C)$15,000
D)$20,000
E)None of these

Question 27

In cash basis accounting, for tax purposes:

A)Income is recognized when it is actually or constructively received and expenses are recognized when they are actually or constructively incurred, regardless of when paid.
B)Income is recognized when it is earned regardless of when received and expenses are recognized when they are actually or constructively incurred.
C)Income is generally recognized when it is actually or constructively received and expenses are generally recognized when they are paid.
D)The cash basis is not allowed for businesses reported on Schedule C.

Question 28

A parent may elect to include a child's income in the parent's return if:

A)No estimated tax has been paid in the name of the child and the child is not subject to backup withholding.
B)The child's income is only from interest and dividend distributions.
C)The child's gross income is more than $1,100 and less than $11,000.
D)All of these must be met for a parent to elect to include a child's income in the parent's return.

Question 29

Mary sells to her father, Robert, her shares in AA Corp for $55,000. The shares cost Mary $80,000. How much loss may Mary claim from the sale?

A)$0
B)$25,000
C)$55,000
D)$80,000
E)None of these is correct

Question 30

Which of the following is true with respect to the related party rules?

A)Bill sells stock to his sister for a $3,000 loss. Bill can deduct the loss on his tax return.
B)A taxpayer's uncle is a related party for purposes of Section 267.
C)A disallowed loss on a related party transaction can be used to offset any future gain when the property is sold to an unrelated party.
D)Under the constructive ownership rules of Section 267, a shareholder owns 10 percent of the stock owned by a corporation in which he or she is a shareholder.
E)None of these

Question 31

Which of the following is not an acceptable method of accounting under the tax law?

A)The accrual method
B)The cash method
C)The hybrid method
D)All of these are acceptable
E)None of these are acceptable

Question 32

Which one of the following entities cannot use the cash method for tax purposes in 2019?

A)A large almond farm with $40 million in average annual gross receipts.
B)A corporation with $24 million in average annual gross receipts and 200 employees.
C)A law firm operating as a personal service corporation with $5.4 million in average annual gross receipts.
D)A small sole proprietorship with $150,000 in average annual gross receipts.
E)All of these may use the cash method.

Question 33

If a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party,

A)An amended return may be filed to claim the loss previously disallowed.
B)The unrelated party may claim the loss previously disallowed.
C)The disallowed loss may be used to offset gain on the subsequent sale.
D)The disallowed loss may be used if there is a further loss on the subsequent sale.
E)The disallowed loss is lost forever.

Question 34

Tom, a cash basis sole proprietor, provides the following information: $$\begin{array} { l r } \text { Gross receipts } & \$ 30,000 \\\text { Dividend income (on personal investments) } & 200 \\\text { Cost of sal es } & 15,400 \\\text { Other operating expenses } & 3,000 \\\text { State business taxes paid } & 300\end{array}$$ What amount should Tom report as net earnings from self-employment?

A)$10,900
B)$11,300
C)$11,400
D)$14,400
E)None of these

Question 35

Tom, age 13, is claimed as a dependent by his parents. Tom has unearned income of $3,400 and $300 of income from mowing lawns in the neighborhood. If the first $2,600 of Tom's net unearned income is taxed at 10%, what is Tom's 2019 income tax liability?

A)$0
B)$260
C)$459
D)$370
E)None of these

Question 36

Assume Karen is 12 years old and her only income is $5,500 of interest income from a bank account with money her parents have given her to save for college. If Karen does not elect to include her income on her parents' return, what is her income tax liability?

A)$550
B)$445
C)$538
D)$963

Question 37

Which of the following types of income is not subject to the "kiddie tax"?

A)Interest income
B)Dividend income
C)Salary income
D)Capital gains on stock sales
E)All of these are subject to the "kiddie tax"

Question 38

Vernon is a cash basis taxpayer with a calendar tax year. On October 1, 2019, Vernon entered into a lease to rent a building for use in his business at $3,000 a month. On that day Vernon paid 18 months' rent on the building, a total of $54,000 ($3,000 × 18 months). How much may Vernon deduct for rent expense on his 2019 tax return?

A)$0
B)$12,000
C)$36,000
D)$54,000
E)None of these

Question 39

Amy is a calendar year taxpayer reporting on the cash basis. Indicate which of the following income or expense items should not be included in her 2019 tax return.

A)On April 15, 2020, she makes a deductible contribution to her IRA for 2019.
B)She prepays half a year of interest in advance on her mortgage on the last day of 2019.
C)She pays all her outstanding invoices for standard business expenses in the last week of December 2019.
D)She sends out a big bill to a customer on January 1, 2020, even though she did all of the work in December of 2019.

Question 40

Becky is a cash basis taxpayer with the following transactions during her calendar tax year: $\begin{array}{llcc} \text { Cash basis revenue } &\$54,000\\ \text { Cash basis expenses, except rent } &25,000\\ \text { Rent expense (paid on December 1) for use of a building for 24 months } &24,000\\\end{array}$
What is the amount of Becky's taxable income from her business for this tax year?

A)$7,000 loss
B)$11,000
C)$27,500
D)$28,000
E)None of these

Question 41

Melody and Todd are married and have employee wages of $250,000 each in 2019. They have no other income. How much additional 0.9% Medicare tax will Melody and Todd have to pay or receive as a refund when they file their 2019 income tax return?

A)$1,350 will be due with their return in addition to amounts withheld.
B)$1,350 will be refunded with their return.
C)$900 will be refunded with their return.
D)$3,600 will be due with their return in addition to amounts withheld.

Question 42

Peter and Joan are married and Joan has self-employment income of $240,000. Peter is retired. How much additional 0.9% Medicare tax will Peter and Joan owe with their 2019 income tax return?

A)$360
B)$2,160
C)$0
D)They will receive a $90 refund

Question 43

Polly is a cash basis taxpayer with the following transactions during the year: $\begin{array}{llcc} \text {Cash received from sales of products } &\$90,000\\ \text { Cash paid for expenses (except rent and interest) } &\$30,000\\ \text {Rent paid on a leased building for 24 months beginning December 1 } &\$54,000\\ \text { Prepaid interest on abank loan, paid on December 1 , for the next 3 months } &\$6,000\\ \text { Four months' rent received on a leased building, on October 1} &\$8,000\\\end{array}$
Calculate Polly's income from her business for this calendar year. $\begin{array}{llcc} \text { Salesincome } &\$\underline{\quad\quad}\\ \text { Rental income} &\underline{\quad\quad}\\ \text { Total income } &&\$\underline{\quad\quad}\\ \text { Expenses other than rent and interest } &\underline{\quad\quad}\\ \text {Rent } &\underline{\quad\quad}\\ \text { Interest } &\underline{\quad\quad}\\ \text { Total expenses} &&\underline{\quad\quad}\\ \text { Net income } &&\$\underline{\quad\quad}\end{array}$

Question 44

List at least two AMT preferences and/or adjustments and show the simplified formula for calculating AMT. Do not include dollar exemption amounts or the tax rate schedule.

Question 45

Dan and Maureen file a joint income tax return for 2019. They have two dependent children, ages 7 and 9. Together they earn wages of $830,000. They also receive taxable interest income of $8,000 and interest on City of Los Angeles bonds of $78,000. During 2019, they received a state income tax refund of $3,000 relating to their 2018 state income tax return on which they itemized deductions. Their expenses for the year consist of the following:
$$\begin{array} { l r } \text { Home mortgage interest (on acquisition debt) } & \$ 19,000 \\\text { Interest on credit cards } & 2,000 \\\text { Real property taxes } & 8,300 \\\text { Cash charitable contributions } & 75,000 \\\text { State income taxes withheld } & 48,000\end{array}$$ Calculate Dan and Maureen's tentative minimum tax liability assuming an AMT exemption amount of $111,700, before any phase-outs. Show your calculations.

Question 46

Lucinda is a self-employed veterinarian in 2019. Her Schedule C net earnings are $86,000 for the year. Calculate the total amount of Lucinda's self-employment tax liability for 2019.

Question 47

In 2019, Tom had net earnings of $80,000 from the plant nursery he owns. What is his liability for self-employment taxes on his earnings?

Question 48

Which of the common deductions below are allowed for both regular tax purposes and for AMT purposes in 2019?

A)The standard deduction
B)Personal and dependency exemptions
C)State income taxes, property taxes, and all other taxes deducted on Schedule A
D)Mortgage interest from the acquisition of a residence with a loan balance less than $750,000
E)Miscellaneous itemized deductions taken on Schedule A

Question 49

What was the original purpose of the alternative minimum tax?

Question 50

Self-employment taxes:

A)Consist of Medicare tax and Social Security tax.
B)Are not affected by wages the taxpayer earns as an employee.
C)Apply to taxpayers with less than $400 in self-employment earnings.
D)Are calculated based on unearned income such as interest and dividends as well as net earnings from self-employment.

Question 51

Which of the following itemized deductions may not be deducted in computing the individual alternative minimum tax?

A)Qualified home mortgage interest
B)State income taxes
C)Medical expenses (limited to 10 percent of AGI)
D)Charitable deductions
E)All of these

Question 52

John and Susan file a joint income tax return for 2019. They have two dependent children, students, ages 19 and 20. John earns wages of $908,000 and John and Susan have interest income of $102,000. In 2019, they settle a state tax audit and pay $50,000 for back state taxes due to an overly aggressive tax-sheltered investment. Their other expenses for the year include: $$\begin{array} { l r } \text { Mortgage interest } & \$ 23,000 \\\text { Real estate taxes } & 12,000 \\\text { State taxes withheld } & 33,500 \\\text { Cash charitable contributions } & 56,000 \\\text { CPA fees for assistance with the state audit } & 4,500\end{array}$$
a.Calculate John and Susan's 2019 regular tax and tentative minimum tax on the schedule provided.


$\begin{array}{llcc} \text { Regul ar tax:} &\\ \text { Adjusted gross income } &\$\underline{\quad\quad}\\ \text {Itemized deductions: } &\\ \text { Total itemized deductions } &\\\\ \text { Taxable income} &\$\underline{\quad\quad}\\ \text { Tax from 2019 tax table} &\$\underline{\quad\quad}\\ \text {Alternative minimum tax: } &\\ \text { Adjusted gross income } &\$\underline{\quad\quad}\\ \text {Add tax preferences and adjustments: } &\underline{\quad\quad}\\ \text { Less allowable deductions:} &\underline{\quad\quad}\\ \text { Total deductions } &\underline{\quad\quad}\\ \text { Alternative minimum taxable income } &\$\underline{\quad\quad}\\ \text { The AMT exemption \(( \$ 111,700 )\) } &\underline{\quad\quad}\\ \text { Alternative minimum tax base} &\underline{\quad\quad}\\ \text { Tentative minimum tax } &\$\underline{\quad\quad}\\ \text {(26\% of income up to \(\$ 194,800 ; 28 \%\) of income in excess of \(\$ 194,800 )\) } &\\ \end{array}$









b.How much is the total tax liability shown on John and Susan's 2019 Form 1040?

Question 53

The 0.9 percent Medicare tax applies to:

A)Earned income
B)Tax exempt income
C)Gain on the sale of a principal residence
D)IRA distributions

Question 54

Beverly is the sole owner of Bev & Associates, an accrual basis corporation. In 2019, Bev & Associates has an unprofitable year and Beverly lends the corporation $50,000 to meet expenses. The corporation accrues interest expense of $5,000 on the loan from Beverly, but does not pay the interest to her in cash.
​
How much of the $5,000 in accrued interest expense can Bev & Associates deduct on its 2019 corporate tax return? Explain.

Question 55

Countryside Acres Apartment Complex had the following transactions during the year:
Rental income collected for Apts A-F
12 months prepaid rental income from new tenant in Apt $G$ who moved in on
November 1
Operating expenses (except for interest)
Prepaid interest expense on bankloan, paid in December, for 6 months (including December) Using the accrual method, calculate the net income: Rental income Apts A-F
Rental income from new tenant
Total income
Operating expenses (except for interest)
Prepaid interest expense
Total expenses
Total net income

Question 56

Which of the following types of income is subject to the self-employment tax?

A)Interest income
B)Gain on sale of real estate
C)Income from a sole proprietor's law practice
D)Dividends from stock
E)None of these

Question 57

The 3.8 percent ACA Medicare tax does not apply to:

A)Interest
B)Dividends
C)Capital gains
D)Wages

Question 58

A taxpayer would be required to pay Social Security and Medicare taxes for a domestic employee in all but one of the following situations. In which situation would this not be required?

A)A nanny who earns $22,000 a year
B)A baby-sitter who earns $1,300 a year
C)A cook who is paid $35,000 a year
D)A cleaning lady who is paid $8,000 a year
E)The taxpayer would not have to pay Social Security and Medicare taxes in any of the above situations

Question 59

BOND Corporation is owned 25 percent by Brian, 30 percent by Orville, 20 percent by Nate, and 25 percent by Dart Corporation. Dart Corporation is owned 80 percent by Brian and 20 percent by Nate. Brian and Orville are brothers. Answer each of the following questions about BOND Corporation under the constructive ownership rules of Section 267:
a.What is Brian's constructive ownership percentage for Section 267 purposes?
b.If Nate sells property to BOND Corporation for a $7,500 loss, what amount of that loss can be recognized for tax purposes (before any annual limitations)?

Question 60

Which of the following items may be subject to the self-employment tax?

A)A partner's distributive share of partnership income
B)Dividend income
C)Capital gains
D)Interest income
E)None of these

Question 61

If a corporation has a short tax year, other than their first or last year of operation, explain how the corporation calculates the tax for the short period.

Question 62

Gerald is single and earns $80,000 in dividend income and $180,000 in wage income in 2019. Compute his additional 3.8 percent Medicare tax on net investment income.

Question 63

Karen is single and earns wages of $250,000 in 2019. She has no other income. How much is her 0.9 percent Medicare tax on earned income?

Question 64

If a cash basis business owner pays 18 months of rent expense in advance during the last month of the tax year, how is this treated on the tax return? What is the reason tax law requires this treatment?

Question 65

Ellen uses the head of household filing status and has a dependent daughter. Ellen has self-employment income of $310,000 as an architect and $10,000 of self-employment losses from a jewelry making business.
​
a. What is Ellen's 0.9% additional Medicare tax for 2019?
b. Is Ellen allowed to include a portion of the 0.9% additional Medicare tax in computing the deduction for self-employment taxes reported as an adjustment for AGI on the front page of her income tax return?