Question 1

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2015,Linda made several deliveries and collected $400 from customers.However,Linda forgot to turn in the proceeds for the day to her employer until the following Friday,January 2,2016.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2016.

Accepted Answer

The income should be recognized in the period it was earned, which is December 2015, not when it was received in January 2016.

Question 2

April,a calendar year taxpayer,is a 40% partner in Pale Partnership,whose fiscal year ends on September 30th.For the fiscal year ending September 30,2015,the partnership had $400,000 net income and for fiscal year ending September 30,2016,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2015 is $160,000 ($400,000 × 40%).

Accepted Answer

April's gross income from the partnership for 2015 is correctly calculated as $160,000 ($400,000 × 40%). The fact that April withdrew $100,000 in December of 2015 does not affect her gross income from the partnership for that year.

Question 3

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Accepted Answer

The answer of Father made an interest-free loan of $25,000...

Question 4

Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.

Accepted Answer

This statement is true. The person who receives the income, in this case Ted, is responsible for paying taxes on it, regardless of who earned the income.

Question 5

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership,2015,it earned $150,000.However,the partners agreed that nothing would be distributed until after the end of March 2016,before Rhonda filed her 2015 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2016.Things were going well in 2016 and therefore the partnership distributed $30,000 to Rhonda at the end of March,as a portion of her share of the partnership's 2015 earnings.The partnership's income for 2016 was $60,000.As a result,Rhonda must recognize $30,000 of gross income in 2015 and $18,000 in 2016.

Accepted Answer

Rhonda must recognize her share of the partnership's income in the year it is earned, not when it is distributed. Therefore, she should recognize $45,000 (30% of $150,000) in 2015 and $18,000 (30% of $60,000) in 2016.

Question 6

Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2015,the accrued interest on the bond was $100.On December 31,2015,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

Accepted Answer

Because Samantha and Brent are cash basis taxpayers, Brent must include in gross income any interest earned on the bond after the date of the gift, which in this case is $300 ($400 collected on December 31,2015 minus $100 accrued on March 31, 2015). The face amount and fair market value of the bond are not relevant for determining taxable income.

Question 7

The B & W Partnership earned taxable income of $140,000 for the year.Bryan is entitled to 50% of the profits,but Bryan withdrew only $60,000 during the year.Bryan's gross income from the partnership for the year is $60,000.

Accepted Answer

The answer of The B & W Partnership earned taxable...

Question 8

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Accepted Answer

The answer of Jacob and Emily were co-owners of a...

Question 9

Tom,a cash basis taxpayer,purchased a bond on March 31 for $10,000,plus $100 accrued interest.In December,Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Accepted Answer

The answer of Tom,a cash basis taxpayer,purchased a bond on...

Question 10

Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

Accepted Answer

Fred's basis in the stock is the same as Paula's basis, which is $75,000. When he sells the stock for $100,000, his recognized gain is $25,000, not $5,000.

Question 11

In all community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Accepted Answer

The answer of In all community property states,the income from...

Question 12

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2015 is $90,000.Only $40,000 was distributed to him in January 2015,and this was his share of the 2014 partnership profits.None of the 2015 profits were distributed .Mark's gross income from the partnership for 2015 is $40,000.

Accepted Answer

As a cash basis taxpayer, Mark's gross income from the partnership for 2015 would only include the amount actually distributed to him in 2015, which is $40,000 from the 2014 profits. Therefore, his gross income from the partnership for 2015 is $40,000 and not $90,000.

Question 13

After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Accepted Answer

Jeff paid the full $18,000 required under the divorce agreement for that year, so Darlene must include that amount in her gross income. However, if the child were to die or reach age 21, Jeff's payments would be reduced to $12,000 per year, and Darlene would still be required to include that amount in her gross income.

Question 14

If the alimony recapture rules apply,the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Accepted Answer

The alimony recapture rules require the recipient of the alimony to decrease their AGI by a portion of the amount included in gross income as alimony in a prior year or years. This is to prevent excessive front-loading of alimony payments that are meant to be spread out evenly over time.

Question 15

When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

Accepted Answer

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared. This is because the buyer is considered to be the owner of the stock on the record date, even though the seller was the owner on the date of declaration. Therefore, the buyer is entitled to the dividend and must recognize it as income.

Question 16

George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

Accepted Answer

According to the IRS, alimony payments are included in the gross income of the recipient and are deductible by the payer, as long as certain requirements are met. Therefore, Erin is required to include the $20,000 of alimony payments in her gross income, even though George earned the income.

Question 17

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2015 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2015.

Accepted Answer

Alvin must recognize the entire $200,000 of the S corporation's earnings as income, not just the $75,000 distributed to him. S corporation shareholders are taxed on their share of the corporation's income, regardless of distributions.

Question 18

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Accepted Answer

Alimony recapture can occur if there is a substantial decrease in the amount of alimony payments in the second or third year of the arrangement. The recapture rule is designed to prevent taxpayers from front-loading alimony payments in order to take advantage of tax deductions and then decreasing payments in later years. If recapture applies, the paying spouse may have to report as income part of what was previously deducted as alimony and the receiving spouse may have to subtract the recaptured amount from their alimony income.

Question 19

Jake is the sole shareholder of an S corporation that earned $60,000 in 2015.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2015.Jake is required to recognize $60,000 of income from the S corporation in 2015.

Accepted Answer

As the sole shareholder of an S corporation, Jake is required to recognize all the income earned by the corporation, regardless of whether or not it was distributed to him. In this case, the S corporation earned $60,000 in 2015, so Jake must recognize that amount as income on his personal tax return for the year. The fact that the corporation only distributed $15,000 to Jake does not change his tax liability.

Question 20

When a business is operated as an S corporation,a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Accepted Answer

As an S corporation, the income and tax liability pass through to the shareholders, even if the income is not distributed as dividends. Shareholders must report their share of the income on their personal tax returns, whether or not they actually received any cash from the corporation.

Quiz 4: Gross Income: Concepts and Inclusions