Question 1

Jack exchanged land with an adjusted basis of $65,000 subject to a liability of $22,000 for $50,000 (FMV) of stock owned by Hayden. Hayden takes the land subject to the liability. Jack incurs $500 of selling expenses. What is the amount of Jack's realized gain on the exchange?

Accepted Answer

The realized gain is calculated as the difference between the FMV of the stock received and the adjusted basis of the land exchanged, minus the selling expenses. In this case, the realized gain is $50,000 - $65,000 - $500 = $6,500.

Question 2

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

Accepted Answer

Losses that are incurred in carrying on a trade or business, or in an activity engaged in for profit, are generally deductible from income for tax purposes. There are some limitations and rules that apply, but in general, this statement is true.

Question 3

Capital recoveries increase the adjusted basis of an asset.

Accepted Answer

The answer of Capital recoveries increase the adjusted basis of...

Question 4

Which one of the following does not affect the adjusted basis of a house held as rental property?

Accepted Answer

Painting is considered a repair and does not affect the adjusted basis, whereas the other options are improvements or deductions that do.

Question 5

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

Accepted Answer

The five different capital gain tax rates that could apply to long-term capital assets sold by noncorporate taxpayers are 0%, 15%, 18.8%, 20%, and 23.8%. The specific rate depends on the taxpayer's income level and the type of asset sold.

Question 6

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 realized a $1,800 loss for tax purposes this year.

Accepted Answer

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

Question 7

Antonio owns land held for investment with a basis of $28,000. The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000. What is Antonio's realized gain?

Accepted Answer

Antonio's realized gain is calculated by subtracting the basis of the property ($28,000) from the amount received ($48,000), resulting in a gain of $20,000.

Question 8

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 9

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

Accepted Answer

This is correct according to tax law. When a gain or loss is recognized, it must eventually be categorized as either a capital gain/loss or an ordinary gain/loss. This classification then affects how the gain or loss is taxed.

Question 10

All realized gains and losses are recognized for tax purposes.

Accepted Answer

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

Question 11

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 statement is true. Expenditures that are considered repairs or maintenance and do not add value or prolong the life of property can be expensed in the year they are incurred. This is in contrast to capital expenditures, which improve the property and must be depreciated over their useful life.

Question 12

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 as the amount realized (i.e. sale price) minus the adjusted basis (i.e. purchase price plus any adjustments such as improvements or depreciation). In this case, the amount realized is $28,000 and the adjusted basis is $25,000, which results in a realized gain of $3,000.

Question 13

Brent must substantiate his travel and entertainment expenses. Which of the following is not required for documentation?

Accepted Answer

A company expense report is not specifically required for documentation of travel and entertainment expenses; rather, detailed records of the purpose, time, place, and business relationship are necessary.

Question 14

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 15

Will exchanges a building with a basis of $35,000, and subject to a liability of $30,000, for land with a FMV of $50,000 owned by Jane. Jane takes the land subject to the liability. The amount realized by Will is

Accepted Answer

The amount realized by Will is the fair market value of the land received ($50,000) plus the liability assumed by Jane ($30,000), totaling $80,000.

Question 16

Michelle purchased her home for $150,000, and subsequently added a garage costing $25,000 and a new porch costing $5,000. Repairs to the home's plumbing cost $1,000. The adjusted basis in the home is

Accepted Answer

The adjusted basis is calculated by adding the cost of improvements to the purchase price. The garage and porch are improvements, so $150,000 + $25,000 + $5,000 = $180,000. Repairs do not add to the basis.

Question 17

Tess has started a new part- time business. She is concerned that the IRS will call it a hobby if her return is audited. This first year of business showed a small profit, and she expects it to continue to show modest profits. She would like to take advantage of the three out of five year profit rule to shift the burden of proof to the IRS. Because of the three- year statute of limitations, this will not be possible for the first year of business.

Accepted Answer

The answer of Tess has started a new part- time...

Question 18

Richard exchanges a building with a basis of $35,000, and subject to a liability of $25,000, for land with a FMV of $50,000 owned by Bill. Bill takes the building subject to the liability. What is the amount of Richard's realized gain?

Accepted Answer

Richard's realized gain is calculated as the fair market value of the land received ($50,000) plus the liability assumed by Bill ($25,000) minus Richard's basis in the building ($35,000). Thus, the realized gain is $50,000 + $25,000 - $35,000 = $40,000.

Question 19

All of the following deductible expenses are deductions for AGI except

Accepted Answer

Deductions reported on Schedule A are itemized deductions, which are deductions from AGI, not for AGI.

Question 20

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). To compute gain or loss, the amount realized is compared to the adjusted basis, resulting in a $1,500 gain in this scenario.

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