Question 1

Interest is not imputed on a gift loan between two individuals totaling $100,000 except when the borrowed funds are used to purchase income- producing property.

Accepted Answer

Interest must be imputed on a gift loan between two individuals regardless of whether the borrowed funds are used to purchase income-producing property or not.

Question 2

Arnie is negotiating the sale of land to Phil. Arnie's basis in the land is $3,000,000, and it currently has a fair market value of $5,000,000. Phil wants to pay the purchase price over three years. Arnie suggests that Phil pays
$2,000,000 at closing, then pay $1,200,000 each of the next three years. Arnie would not require that Phil pay any interest under these terms. Discuss the tax issues that Arnie should consider.

Accepted Answer

The answer of Arnie is negotiating the sale of land...

Question 3

Interest is not imputed on a gift loan between two individuals totaling $15,000 except when the borrowed funds are used to purchase income- producing property.

Accepted Answer

The answer of Interest is not imputed on a gift...

Question 4

A taxpayer obtains permission to change an accounting method. The change will result in a positive adjustment to income. To help in managing its cash flow, the taxpayer would like to spread the change over multiple years. In order to take advantage of this opportunity, the net positive adjustment must exceed

Accepted Answer

The answer of A taxpayer obtains permission to change an...

Question 5

Discuss the purpose of the imputed interest rules.

Accepted Answer

The answer of Discuss the purpose of the imputed interest...

Question 6

Which of the following businesses is most likely to benefit from an election to account for its inventory under LIFO?

Accepted Answer

LIFO (Last-In, First-Out) is beneficial for companies in industries where costs are rising, as it allows them to match higher recent costs against current revenues, reducing taxable income. The auto industry often experiences steady cost increases, making it suitable for LIFO.

Question 7

Emily made the following interest free loans to her children:
(1) $10,000 to Erin for a down payment on a new home. Her net investment income for the year is $1,300.
(2) $50,000 to Sasha to purchase stock. Her net investment income for the year is $800.
(3) $60,000 to Tim to purchase a new boat. His net investment income for the year is $2,800.
The applicable federal interest rate on similar loans is 5%. What is the amount of interest income that Emily mus report from these transactions?

Accepted Answer

The answer of Emily made the following interest free loans...

Question 8

Imputation of interest could be required on all of the following loans with the exception of

Accepted Answer

Imputation of interest is generally required for loans between related parties, such as family members or business partners, to prevent tax avoidance. However, loans between unrelated parties, like two best friends, typically do not require imputation of interest.

Question 9

A taxpayer receives permission for a voluntary change in accounting method, resulting in a negative adjustment to income. The taxpayer would like to recognize the full negative adjustment in the current year in order to maximize tax savings and time value of money. In order to recognize the full adjustment this year, the adjustment must not exceed

Accepted Answer

The negative adjustment to income can be recognized in the current year if it does not exceed $25,000.

Question 10

Jared wants his daughter, Jacqueline, to learn about the stock market. He loans Jacqueline $30,000, but does not require Jacqueline to pay interest. Jared tells Jacqueline that she can repay him from the proceeds of future stock sales. Discuss the tax issues that Jared should consider.

Accepted Answer

The answer of Jared wants his daughter, Jacqueline, to learn...

Question 11

Vector Corporation has been using an incorrect method in accounting for supplies expense. It can change to the correct method without filing 3115.

Accepted Answer

The answer of Vector Corporation has been using an incorrect...

Question 12

Jennifer made interest- free gift loans to each of her four children as follows: (1) John borrowed $9,500 to purchase an automobile. His net investment income is $1,500.
(2) Rick borrowed $50,000 to purchase a trailer. His net investment income is $900.
(3) Bert borrowed $25,000 to purchase stock. His net investment income is $1,200.
(4) Elizabeth borrowed $110,000 to purchase a home. Her net investment income is $800.
Assuming a 5% interest rate, on which loans must interest be imputed?

Accepted Answer

The answer of Jennifer made interest- free gift loans to...

Question 13

Chana made a $75,000 interest- free loan to her son, Trey, who used the money to retire a mortgage on his personal residence. Trey's only source of income was salary of $50,000 and $940 interest income on a savings account. The relevant Federal interest rate was 5% and the loan was outstanding all year long. What amount must Chana include as interest income as a result of this transaction?

Accepted Answer

Under the IRS rules for interest-free loans, if the borrower's net investment income is $1,000 or less, the lender does not have to report any imputed interest income. Since Trey's interest income is $940, which is less than $1,000, Chana does not have to include any interest income.

Question 14

Prior Corp. plans to change its method of accounting for supplies. Both the old and new methods are acceptable. Which of the following statements is correct regarding the change?

Accepted Answer

The answer of Prior Corp. plans to change its method...

Question 15

In general, a change in accounting method must be approved by the IRS.

Accepted Answer

A change in accounting method must be approved by the IRS in order to ensure compliance with tax laws and regulations. This approval is typically granted through the filing of Form 3115, Application for Change in Accounting Method.

Question 16

Owners of pass- through entities may defer income recognition by selecting a different tax year for the business if at least 25% of the business revenues occur during the last two months of the proposed year.

Accepted Answer

This is true according to the IRS guidelines. This option allows pass-through entity owners to better match their income and expenses, potentially lowering their overall tax liability.

Question 17

All of the following transactions are exempt from rules regarding imputed interest with the exception of

Accepted Answer

Imputed interest rules apply to certain below-market loans, including sales of property where the payment is deferred, such as the sale of land with payment due in 5 years.

Question 18

When a new business is formed, it must request approval from the IRS regarding the adoption of its various accounting methods.

Accepted Answer

The answer of When a new business is formed, it...

Question 19

A corporation is starting to produce watches with electronic personal assistant capabilities. Generally, a business producing this type of product will want to elect the LIFO inventory method.

Accepted Answer

The choice of inventory method (LIFO, FIFO, etc.) is not typically influenced by the type of product being produced, but rather by accounting and tax considerations. The decision to elect LIFO or another inventory method should be based on a thorough analysis of the potential impact on financial statements and tax liabilities.

Question 20

In order to avoid the imputation of interest, the stated interest on a transaction must be at least equal to 100% of the Federal Reserve funds rate.

Accepted Answer

In order to avoid the imputation of interest, the stated interest on a transaction must be at least equal to 110% of the Federal Reserve funds rate.

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals