Question 1

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 is passed through to the shareholders and they are responsible for paying tax on their share, regardless of whether or not the income was distributed. This is referred to as "phantom income."

Question 2

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

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Question 3

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2016 is $90,000.Only $40,000 was distributed to him in January 2016,and this was his share of the 2015 partnership profits.None of the 2016 profits were distributed .Mark's gross income from the partnership for 2016 is $40,000.

Accepted Answer

As a cash basis taxpayer, Mark only includes income that he received during the taxable year. Therefore, he should only include the $40,000 that was distributed to him in January 2016, which was his share of the 2015 partnership profits. The remaining $50,000 of his share of the 2016 partnership profits would not be included in his gross income until they are actually distributed to him.

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

According to the IRS, alimony is taxable income for the recipient and tax-deductible for the payer. Therefore, Alice would be responsible for paying taxes on the $75,000 in alimony she received from Ted.

Question 5

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 30,2016,the partnership had $400,000 net income and for fiscal year ending September 30,2017,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2016 is $160,000 ($400,000 × 40%).

Accepted Answer

April's share of the partnership's net income for fiscal year ending September 30, 2016 is $160,000 ($400,000 × 40%). Since April withdrew $100,000 from the partnership in December 2016, her taxable income from the partnership for calendar year 2016 is $60,000 ($160,000 - $100,000).

Question 6

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

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Question 7

Jake is the sole shareholder of an S corporation that earned $60,000 in 2016.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2016.Jake is required to recognize $60,000 of income from the S corporation in 2016.

Accepted Answer

As the sole shareholder of an S corporation, Jake is required to recognize all ordinary income, including income that is retained by the corporation and not distributed to him. Therefore, Jake is required to recognize the full $60,000 of income from the S corporation in 2016, regardless of the amount of cash distributed to him.

Question 8

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 alimony to reduce their AGI by a certain amount in order to avoid paying additional taxes. This reduction is based on a portion of the amount of alimony included in their gross income in prior years. Therefore, the statement is true.

Question 9

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 10

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

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Question 11

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

Because the transfer is pursuant to a divorce agreement, it qualifies for a tax-free transfer under Internal Revenue Code section 1041. Therefore, Fred's cost basis in the stock for tax purposes is the same as Paula's, which is $75,000. When Fred later sells the stock for $100,000, his recognized gain is $25,000, not $5,000.

Question 12

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

Alimony payments are taxable income for the recipient and tax-deductible for the payer, according to IRS rules. Therefore, Erin will have to include the $20,000 she receives from George in her gross income, even though George earned the income.

Question 13

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 is a provision in the tax law that can occur if the alimony payments in the third year of a divorce decree decrease substantially compared to the first and second year. This is intended to prevent taxpayers from front-loading alimony payments in order to take advantage of tax breaks. If alimony recapture occurs, the payer may have to add back some of the alimony payments as income in the third year, and the recipient may have to deduct some of the alimony payments as income in the first and second years.

Question 14

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

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Question 15

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership,2016,it earned $150,000.However,the partners agreed that nothing would be distributed until after the end of March 2017,before Rhonda filed her 2016 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2017.Things were going well in 2017 and therefore the partnership distributed $30,000 to Rhonda at the end of March,as a portion of her share of the partnership's 2016 earnings.The partnership's income for 2017 was $60,000.As a result,Rhonda must recognize $30,000 of gross income in 2016 and $18,000 in 2017.

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 2016 and $18,000 (30% of $60,000) in 2017.

Question 16

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

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Question 17

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2016,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 2,2017.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2017.

Accepted Answer

The income should be recognized in 2016 when it was earned, not when it was received, according to the accrual accounting principle.

Question 18

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2016 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2016.

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 19

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 31,2016,the accrued interest on the bond was $100.On December 31,2016,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

As a cash basis taxpayer, Brent must include in gross income any income earned after the date of the gift. Since he collected $400 in interest on December 31, 2016, and $100 of that interest had already accrued on the gift date, he must include the $300 in interest earned after the gift date in his gross income.

Question 20

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

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Quiz 4: Gross Income Concepts and Inclusions