Question 1

To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied. Which of the following are correct statements about the credit? I. Rehabilitation of business-use, investment-use, and personal-use residential real estate that is certified as historic qualifies for the historic structures rehabilitation credit. II. The rehabilitation work cannot remove more than 25% of the internal walls and framework.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of To obtain the rehabilitation expenditures tax credit...

Question 2

Kelly purchases a warehouse for her sole proprietorship on January 5, 2014 for $1,000,000. She claims MACRS depreciation of $25,641 for the year. The depreciation under the Alternative Depreciation System ADS) is $25,000. What is the amount of Kelly's AMT adjustment for depreciation on the warehouse?
A) no adjustment is necessary
B) a positive $ 641
C) a negative $ 641
D) a positive $25,641
E) a negative $25,641

Accepted Answer

The AMT adjustment is the difference between the MACRS depreciation and the ADS depreciation. Here, it is $25,641 (MACRS) - $25,000 (ADS) = $641. Since MACRS is greater, the adjustment is positive.

Question 3

On October 2, 2014, Miriam sells 1,000 shares of stock at $20 per share. Miriam acquired the stock on November 12, 2013, when she exercised her option to purchase the shares through her company's incentive stock option plan. The exercise price was $11 per share and the fair market value of the stock at the date of exercise was $14 per share. For 2014, Miriam must report Ordinary Capital Income Gain
A) $3,000 $6,000
B) $6,000 $3,000
C) $9,000 $-0-
D) $-0- $9,000

Accepted Answer

The correct answer is A because the ordinary capital income gain is the difference between the sale price and the exercise price, which is $20 - $11 = $9 per share. Since Miriam sold 1,000 shares, the total ordinary capital income gain is $9 x 1,000 = $9,000.

Question 4

On January 22, 2012, Dalton Corporation granted Kathleen an option to acquire 1,500 shares of the company's stock for $7 per share. The fair market price of the stock on the date of grant was $13. The stock requires that Kathleen remain with the company for one year after the date of exercise. The option did not have a readily ascertainable fair market value. Kathleen exercises the option on August 10, 2013, when the fair market value of the stock is $17. She makes a Section 83 b) election at the exercise date. On August 10, 2014, the fair market value of the stock is $23 per share. How much must she report as income in 2013 and 2014

Accepted Answer

The answer of On January 22, 2012, Dalton Corporation granted...

Question 5

In 2009, Merlin received the right to acquire 1,200 shares of Noble Corporation stock through the company's incentive stock option plan at an exercise price of $17 per share. On January 4, 2014, Merlin exercises the option when the fair market value of the stock is $22 per share. Which of the following isare) correct statements? I. Noble can deduct $6,000 as compensation expense in 2014. II. Merlin does not recognize any income but must include $6,000 as a tax preference item in computing his alternative minimum taxable income.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

Merlin does not recognize any regular income upon exercising the incentive stock option, but the bargain element ($5 per share) is a tax preference item for AMT purposes. Noble cannot deduct the $6,000 as compensation expense because it is an incentive stock option.

Question 6

Hillside Group, a partnership, purchased a building for $60,000 that was originally placed in service in 1929. The partnership incurs $180,000 rehabilitating the building. The building serves as the partnership's headquarters. The rehabilitation is completed in November 2014. What amount can the Hillside Group claim on their partnership return as a rehabilitation tax credit?
A) $2,000
B) $3,000
C) $6,000
D) $18,000
E) $24,000

Accepted Answer

The rehabilitation tax credit is 10% of the rehabilitation costs for buildings placed in service before 1936. Therefore, 10% of $180,000 is $18,000.

Question 7

On October 23, 2014, McIntyre sells 700 shares of stock at $26 per share. McIntyre acquired the stock on June 1, 2013, when he exercised his option to purchase the shares through his company's incentive stock option plan. The exercise price was $12 per share and the fair market value of the stock at the date of exercise was $16 per share. For 2014, McIntyre must report Ordinary Capital Income Gain
A) $-0- $7,000
B) $-0- $9,800
C) $9,800 $-0-
D) $2,800 $7,000

Accepted Answer

The answer of On October 23, 2014, McIntyre sells 700...

Question 8

Which of the following itemized deductions is not allowed for AMT purposes?
A) State income taxes.
B) Qualified housing interest.
C) Investment interest.
D) Interest on home equity loan where loan proceeds are used to improve the residence.
E) Charitable contributions.

Accepted Answer

State income taxes are not deductible for AMT purposes. This is because the AMT already includes a provision to take into account the state and local tax deductions, effectively eliminating the deduction for state income taxes. The other deductions listed are allowed for AMT purposes, subject to certain limitations and conditions.

Question 9

Dunn Company bought an old building in downtown Lafayette for $75,000. The land was not purchased; it is being leased. The building was originally placed into service in 1918. Dunn spends $100,000 to rehabilitate the building with the intent to develop a microbrewery on the site. The company retained 80% of the external and internal walls and framework. Assume the amount of the older building rehabilitation credit Dunn can claim is $10,000. What is the basis in the building for depreciation purposes?
A) $100,000
B) $145,000
C) $105,000
D) $165,000
E) $175,000

Accepted Answer

The basis in the building for depreciation purposes is calculated as follows: 
Purchase price: $75,000 
Rehabilitation expenditures: $100,000 
Older building rehabilitation credit: -$10,000 
Total basis: $165,000 (Option D)

Question 10

Patricia and her daughter Sheila each own 50% of Draper, Inc. Patricia is the president and CFO of the corporation and receives a salary of $125,000. Other individuals with similar responsibilities as Patricia are paid approximately the same salary. Sheila, who is vice president, is paid a salary of $50,000. However, Sheila is not involved in the business decisions and rarely visits the office. Which of the following are correct statements? I. Draper can deduct $175,000 as salary expense. II. Sheila must report $50,000 as income.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of Patricia and her daughter Sheila each own...

Question 11

Nestor receives the right to acquire 1,000 shares of Knolls Corporation stock through the company's incentive stock option plan. The fair market value of the stock at the date of the grant is $20 and the exercise price of the option is $24 per share. For the option to qualify as an incentive stock option I. Nestor must exercise the option within 10 years of the date of grant. II. Nestor must hold the stock for at least 2 years after the date of exercise before selling it.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of Nestor receives the right to acquire 1,000...

Question 12

When calculating AMTI, individual taxpayers must add back the following: I. The standard deduction amount. II. Casualty and theft losses.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of When calculating AMTI, individual taxpayers must add...

Question 13

On February 19, 2012, Woodbridge Corporation granted Harvey an option to acquire 200 shares of the company's stock for $10 per share. The fair market price of the stock on the date of grant was $16. The stock requires that Harvey remain with the company for one year after the date of exercise. The option did not have a readily ascertainable fair market value. Harvey exercises the option on September 23, 2013, when the fair market value of the stock is $19. He makes a Section 83b) election at the exercise date. On September 23, 2014, the fair market value of the stock is $25 per share. How much must he report as income in 2014?
A) $-0-
B) $1,200
C) $1,800
D) $2,000
E) $3,000

Accepted Answer

Since Harvey made a Section 83(b) election at the exercise date, he reports income at the time of exercise, not when the stock vests. Therefore, he does not report any additional income in 2014.

Question 14

With regard to the alternative minimum tax AMT), I. the AMT rate equals the highest individual income tax rate. II. the AMT is separate and distinct from, yet parallel to, the regular income tax system.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

II is correct because the AMT operates as a parallel tax system to the regular income tax, designed to ensure that individuals and corporations with substantial income cannot avoid significant tax liability through deductions and credits. Statement I is incorrect because the AMT rates are not necessarily equal to the highest individual income tax rate; they are set at 26% or 28% for individuals.

Question 15

To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied. Which of the following are correct statements about the credit? I. If the rehabilitated structure is sold before the end of the ten-year period following the year of the tax credit, recapture occurs. II. The amount of the credit can be either 10% or 20% of qualified expenditures, depending on the classification of the building.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of To obtain the rehabilitation expenditures tax credit...

Question 16

Which of the following statements are correct concerning the general business credit? I. The general business tax credit only applies to an individual or corporation with a tax liability in excess of $100,000. II. The general business credit only applies to an individual or corporation that has a tax credit carryover or can claim more than one general business credit during the year.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

Statement I is not correct as there is no minimum tax liability required to claim the general business credit. However, statement II is correct as a taxpayer can only claim the general business credit if they have either a tax credit carryover from a previous year or can claim more than one general business credit during the current year.

Question 17

When calculating AMTI, individual taxpayers must add back the following: I. Miscellaneous itemized deductions subject to the 2% limitation. II. Personal exemption amounts.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of When calculating AMTI, individual taxpayers must add...

Question 18

Helen receives the right to acquire 700 shares of Smith Corporation stock through the company's incentive stock option plan. The fair market value of the stock at the date of the grant is $8 and the exercise price of the option is $15 per share. The fair market value of the stock at the date of exercise is $19. Helen will recognize income at the date of grant and the exercise date of Date of grant Exercise date

Accepted Answer

The answer of Helen receives the right to acquire 700...

Question 19

When calculating AMTI, individual taxpayers must add back the following: I. Charitable contributions. II. Qualified home mortgage interest.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

When calculating Alternative Minimum Taxable Income (AMTI), individual taxpayers do not add back charitable contributions or qualified home mortgage interest. These items are allowable deductions in the calculation of AMTI.

Question 20

Which of the following is are) AMT tax preference items)? I. Tax-exempt interest from private activity bonds. II. Percentage depletion in excess of basis.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of Which of the following is are) AMT...

Quiz 15: Choice of Business Entity-Other Considerations

Which of the following itemized deductions is not allowed for AMT purposes?

When calculating AMTI, individual taxpayers must add back the following: I. The standard deduction amount. II. Casualty and theft losses.

With regard to the alternative minimum tax AMT) , I. the AMT rate equals the highest individual income tax rate. II. the AMT is separate and distinct from, yet parallel to, the regular income tax system.

When calculating AMTI, individual taxpayers must add back the following: I. Miscellaneous itemized deductions subject to the 2% limitation. II. Personal exemption amounts.

When calculating AMTI, individual taxpayers must add back the following: I. Charitable contributions. II. Qualified home mortgage interest.

Which of the following is are) AMT tax preference items) ? I. Tax-exempt interest from private activity bonds. II. Percentage depletion in excess of basis.