Question 1

Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.

Accepted Answer

This is correct as losses can typically be deducted if they were incurred in carrying on a trade or business or engaged in for profit. However, there may be certain limitations or restrictions on deducting losses depending on the specific circumstances.

Question 2

Interest incurred during the development and manufacture of a machine must be capitalized.

Accepted Answer

According to generally accepted accounting principles (GAAP), interest incurred during the development and manufacture of a machine is considered a cost of acquiring the asset and therefore must be capitalized. This means that it is added to the cost of the machine and depreciated over its useful life.

Question 3

If stock sold or exchanged is not specifically identified, the FIFO (first-in, first-out)method of identification must be used.

Accepted Answer

This statement is true. If no specific identification of stocks sold or exchanged is provided, then the IRS requires the FIFO method of identification to be used. FIFO means that the shares that were acquired first are treated as being sold first, followed by shares acquired at later dates.

Question 4

The initial adjusted basis of property depends upon how the property is acquired.

Accepted Answer

The initial adjusted basis of property is determined by how the property is acquired, as it takes into account the purchase price, improvements, and certain other costs associated with acquiring the property.

Question 5

Rick sells stock of Ty Corporation, which has an adjusted basis of $20,000, for $22,000. He pays a sales commission of $500. In computing his gain or loss, the amount realized by Rick is $1,500.

Accepted Answer

The amount realized by Rick would be $21,500 ($22,000 - $500 commission). Therefore, his gain would be $1,500 ($21,500 - $20,000 basis).

Question 6

A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000. The taxpayer has a realized gain of $3,000.

Accepted Answer

The realized gain is calculated by subtracting the basis (cost) of the asset from the amount realized (selling price). In this case, the basis is $25,000 and the amount realized is $28,000, so the realized gain is $3,000.

Question 7

An uncle gifts a parcel of land to his niece, and he has to pay gift taxes. The land has appreciated substantially since he purchased it 20 year ago. A portion of gift taxes paid by the uncle will increase the niece's basis of the land.

Accepted Answer

The portion of gift taxes paid by the uncle can increase the niece's basis of the land, as it is deemed an additional gift to her. This can help reduce her capital gains tax liability if she sells the land in the future. However, it is important to note that the rules surrounding gift taxes and their impact on basis can be complex, and it is best to consult with a tax professional for specific guidance.

Question 8

For purposes of calculating depreciation, property converted from personal use to business use will take on a basis equal to the greater of its FMV or its adjusted basis on the date of the conversion.

Accepted Answer

The answer of For purposes of calculating depreciation, property converted...

Question 9

A taxpayer purchased an asset for $50,000 several years ago. He is now planning to sell it. Under the recovery of basis doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.

Accepted Answer

The answer of A taxpayer purchased an asset for $50,000...

Question 10

Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.

Accepted Answer

This is the definition of a deductible expense, which can be claimed as an expense in the current year's tax filings. Non-deductible expenses are those that are considered capital expenditures, which must be spread out over several years' tax filings as depreciation expenses.

Question 11

All recognized gains and losses must eventually be classified either as capital or ordinary.

Accepted Answer

This is true according to the tax law, which classifies gains and losses as either capital or ordinary. Capital gains and losses are realized from the sale or exchange of a capital asset, such as stocks or real estate, while ordinary gains and losses are those derived from regular income sources like salaries or business operations.

Question 12

All realized gains and losses are recognized for tax purposes.

Accepted Answer

The answer of All realized gains and losses are recognized...

Question 13

On January 1 of this year, Brad purchased 100 shares of stock at $4,000. By December 31 of this year, the stock had declined in value to $2,200, but Brad still held the shares. Brad has recognized a $1,800 loss for tax purposes this year.

Accepted Answer

The answer of On January 1 of this year, Brad...

Question 14

With regard to taxable gifts after 1976, no gift tax is added to the basis of the property if the donor's basis is greater than the FMV of the property.

Accepted Answer

This statement is true according to the IRS regulations. If the donor's basis in the gifted property is higher than its fair market value (FMV), the gift tax will not be added to the basis of the property for tax purposes. This means that the recipient of the gift will likely face a larger capital gains tax if they sell the gifted property in the future because their basis will be the same as the donor's.

Question 15

Five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.

Accepted Answer

Long-term capital assets can be subject to different tax rates depending on the taxpayer's income and filing status. The five different capital gain tax rates are 0%, 15%, 18.8%, 20%, and 23.8%.

Question 16

Gains and losses are recognized when property is disposed of by gift or bequest.

Accepted Answer

The answer of Gains and losses are recognized when property...

Question 17

If Houston Printing Co. purchases a new printing press during the current year for $30,000, pays sales taxes of $2,000, and pays $1,000 for installation, the cost basis for the printing press is $33,000.

Accepted Answer

The cost basis of an asset includes the purchase price, sales taxes, and any installation costs. Therefore, the cost basis for the printing press in this scenario is $30,000 + $2,000 + $1,000 = $33,000.

Question 18

Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.

Accepted Answer

Funds borrowed for an asset are included in the cost because they are a part of the financing cost of the asset. The borrowed funds are typically repaid over time, but their impact on the cost of the asset is taken into account from the beginning.

Question 19

Capitalization of interest is required if debt is incurred to construct real property.

Accepted Answer

Capitalization of interest is required as per the Generally Accepted Accounting Principles (GAAP) if debt is incurred to construct real property. This means that the interest incurred during the construction period is added to the cost of the property and is not expensed immediately. It is then depreciated over the useful life of the property.

Question 20

Unless the alternate valuation date is elected, the basis of property received from a decedent is generally the property's fair market value at the date of decedent's death.

Accepted Answer

This is true according to the Internal Revenue Service (IRS).

Quiz 5: Property Transactions: Capital Gains and Losses