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112 Cards in this Set
- Front
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When a business mistakenly claims too little depreciation for the prior year, the business may elect to increase future depreciation to make up the difference allowable depreciation. true/false |
false |
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An asset's capitalized cost basis includes the actual purchase price and all other expenses associated with placing the asset in service. true/false |
true |
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Depreciation is currently computed under the Accelerated Cost Recovery System (ACRS). true/false |
false |
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If taxpayer places only one asset (machinery) in service during the fourth quarter of the year, the mid-quarter convention must be used. true/false |
true |
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The same depreciation convention is used for an asset in the year of acquisition also applies for that asset in the year of disposition. true/false |
true |
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When applicable, all taxpayers may use bonus depreciation for qualifying property. true/false |
true |
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The convention for tax amortization is always the half-year convention. true/false |
false |
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Natural resources may be recovered using the greater of cost or percentage depletion method. true/false |
true |
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what business assets is not depreciated? |
coal deposit |
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what convention is the general rule for intangible property? |
full-month |
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Dax purchased only one asset during the current year. It placed in service equipment (7-year property) on September 10 with a basis of $40,000. Calculate the maximum depreciation expense (ignoring any §179 or bonus depreciation): |
$5,716 The property is depreciated using the DDB method, half-year convention, and 7-year recovery period. The depreciation is $40,000 x 14.29 percent. |
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Frazier LLC placed in service on June 19, 2014 computer equipment (5-year property) with a basis of $2,050,000. Assume that Frazier has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing). Assume the 2013 §179 limits are extended to 2014: |
$770,000 the $500,000 section 179 expense is reduced to $450,000 because of the property placed in service limitation ($2,050,000 - $2,000,000 threshold). The half year convention applies. The expense is $330,000 which is depreciation of $1,600,000 x .2 = $320,000 plus $450,000 of section 179 expense. |
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Bonnie purchased a computer (5 year property) for use in her sole proprietorship. The basis of the computer was $3,000. Bonnie used the computer in her business 80 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie's depreciation expense during the first year assuming the sole proprietorship had a loss during the year: |
$480 The asset's recovery period is 5 years and the half year convention applies, the calculation is $3,000 x .2 x 80% = $480. |
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Griff LLC purchased an office building and land during the current year for $500,000. The purchase price was allocated as follows: $350,000 to the building and $150,000 to the land. The property was placed in service on August 22. Calculate Griff's maximum depreciation: |
$3,371 The mid-month convention applies. Non-residential property has a 39 year recovery period. The depreciation is $3,371($350,000 x .963%). |
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Assume that Brittany acquires a competitor's assets on March 1st. The purchase price was $250,000. Of the amount, $150,000 is allocated to tangible assets and $100,000 is allocated to goodwill (a §197 intangible asset). What is Brittany's amortization expense for the current year? |
$5,556 The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $5,556 (($100,000 / 180) x 10). |
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Dorn purchased the rights to extract turquoise on a tract of land over a five year period. Dorn paid $200,000 for extraction rights. A geologist estimates that Dorn will recover 10,000 pounds of turquoise. During the current year, Dorn extracted 2,500 pounds of turquoise, which it sold for $150,000. What is Dorn's cost depletion expense for the current year? |
$50,000 The depletion expense is $50,000 (($200,000 / 10,000) x 2,500). |
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3 Types of cost recovery methods |
-Depreciation -Amortization -Depletion |
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Depreciable property |
personal and real |
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comprised of tangible assets such as automobiles, equipment, and machinery |
personal property |
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comprised of buildings and land(although land is nondepreciable) |
real property |
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Calculation for asset tax basis |
Asset’s Initial Cost or Historical Cost minus Accumulated Depreciation |
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Improvement vs. routine maintenance |
Routine maintenance: costs are immediately deductible as ordinary business expenses improvement: an additional cost significantly extends an asset's useful life or increases the value of the asset, the expenditure generates a new asset |
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Tax depreciation system |
To depreciate an asset, a business must determine: -Original basis -Depreciation method -Recovery period -Depreciation convention |
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3 Allowable methods under MACRS |
-200 percent (double) declining balance (DB) -150 percent declining balance -straight-line |
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Depreciation conventions under MACRS |
-half year -mid quarter -mid month |
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property classification for half year convention |
-tangible personal property -used most of the time -office furniture -machinery -used delivery truck -disposition |
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property classification for mid quarter convention |
-tangible personal property -office furniture -machinery -used delivery truck |
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property classification for mid month convention |
-real property -residential rental -nonresidential |
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Calculate amortization for §197 intangible assets |
life span years divided by 15 years times basis or purchase price = amortization for 197 tangible assets |
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The amount of an asset's cost that has yet to be recovered through cost recovery deductions |
adjusted basis |
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Calculation for realized gain or loss |
cash recvd + FMV + buyers liabs - sellers exps |
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An asset's tax adjusted basis is usually less than its book adjusted basis. true/false |
true |
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Tax gain or loss realized is generally recognized for tax purposes. true/false |
true |
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Property held for investment and inventory are examples of capital assets. true/false |
false |
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A parcel of land used in a trade or business is a capital asset. true/false |
false |
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Section 1239 recharacterizes gain on the sale of depreciable property to related person as ordinary income. true/false |
true |
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In a deferred like-kind exchange the like-kind property to be received must be identified within 60 days and acquired within 200 days from the initial exchange. true/false |
false |
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An installment sale is any sale where at least a portion of the sales proceeds are recognized in a subsequent taxable year. true/false |
true |
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what is used in the calculation of the amount realized: |
Liabilities assumed by seller. |
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what realized gains results in a recognized gain? |
Sale to a related party at a gain. |
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what results in an ordinary gain or loss? |
Sale of a machine held for six months at a gain. |
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what is true regarding depreciation recapture? |
The lesser of accumulated depreciation or gain recognized becomes ordinary. |
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Kimberly sold equipment that it uses in her business for $50,000. Kimberly bought the equipment two years ago for $60,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Kimberly's gain or loss? |
$20,000 ordinary gain. Section 1245 recaptures the lesser of depreciation taken ($30,000) or gain ($20,000) as ordinary income. |
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Erika Corporation sold an office building that it used in its business for $600,000. Erika bought the building ten years ago for $400,000 and has claimed $100,000 of depreciation expense. What is the amount and character of Erika's gain or loss? |
$20,000 ordinary and $280,000 section 1231 gain. For corporations, section 291 recapture 20 percent of the lesser of depreciation taken or the realized gain as ordinary income. The remaining gain is section 1231. |
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what is true regarding section 1239? |
It only applies to gains on sales of depreciable property between related taxpayers. |
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Baker traded furniture used in her business to a furniture dealer for some new furniture. Baker originally purchased the furniture for $50,000 and it had an adjusted basis of $30,000 at the time of the exchange. The new furniture had a fair market value of $35,000. Baker also gave $5,000 to the dealer in the transaction. What is Baker's adjusted basis in the new furniture after the exchange? |
$35,000. The exchange qualifies as a like-kind exchange. Since boot was given in the transaction, the fair market value of the boot given ($5,000) is added to the adjusted basis ($30,000) of the property given up. |
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Type of income that may be recognized in property transactions (capital, §1231, §1245, ordinary) |
ordinary income |
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Assets created or used in a taxpayer's trade or business. Business assets held for one year or less. |
Ordinary assets |
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Assets held for investment purposes. Assets held for personaluse purposes. |
Capital assets |
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Depreciable assets and land used in a trade or business held for more than one year. |
§1231 assets |
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depreciable real property real property subject to cost recovery deductions. |
§1250 property |
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Net §1231 gains may be recharacterized as ordinary income under the ? |
§1231 look-back rule. |
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Adjusted basis of property in like-kind exchanges |
the fair market value of the new asset minus deferred gain or plus deferred loss on the exchange |
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a nontaxable (or partially taxable) trade or exchange of assets that are similar or related in use. |
like-kind exchanges |
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people or organizations that facilitate the transfer of property between taxpayers in a like-kind exchange. Typically, the intermediary receives the cash from selling the property received from the taxpayer and uses it to acquire like-kind property identified by the taxpayer. |
Third parties involved in like-kind exchanges |
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a direct or indirect conversion of property through natural disaster, government condemnation, or accident that allows a taxpayer to defer realized gain if certain requirements are met. |
involuntary conversions |
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Disallowed losses between related parties |
certain family members, related corporations, and other entities. Losses on sales to related persons The related person may deduct the previously disallowed loss to the extent of the gain on the sale to the unrelated third person. |
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Generally, interest income is taxed at ordinary rates and dividend income is taxed at capital gains rates. true/false |
true |
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An investment's time horizon affects the after-tax rate of return on investments taxed annually. true/false |
false |
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When a taxable bond is issued at a discount, taxpayers are required to amortize the discount and reduce the amount of interest reported in the current year by the amount of current year original issue discount amortization. true/false |
false |
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Qualified dividends received by individuals are taxed at either a 0 percent, a 15 percent, or a 20 percent preferential rate. true/false |
true |
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The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term gains and losses, (2) net long-term gains and losses, and (3) net the outcome of steps (1) and (2) if they are of similar sign.
true/false |
false |
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Dave and Jane file a joint return. They sell a capital asset at a $140,000 loss. Even though they have no capital gains, $3,000 of the loss can still be deducted in the current year if they have at least $3,000 of ordinary income. true/false |
false |
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Investors must consider illicit taxes as well as explicit taxes in order to make correct investment choices. true/false |
false |
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Generally, losses from rental activities are considered to be passive activity losses. true/false |
true |
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what type of interest income is taxed as it is earned? |
interest from money market accounts |
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If John invested $20,000 in a stock paying annual qualifying dividends equal to 4% of his investment, what would the value of his investment be 5 years from now? Assume John's marginal ordinary tax rate is 15%. |
$24,333 ATRR = .04 (.04 x (1- 0)); $20,000 x (1.04)5 = $24,333. |
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In X8, Karl had the following capital gains (losses) from the sale of his investments: $6,000 LTCG, $30,000 STCG, ($12,000) LTCL, and ($18,000) STCL. What is the amount and nature of Karl's capital gains and losses? |
$6,000 net short-term capital gain $6,000 (LTCG) + ($12,000) (LTCL) = ($6,000) (NLTCL); $30,000 (STCG) + ($18,000) (STCL) = $12,000 (NSTCG); ($6,000) (NLTCL) + $12,000 (NSTCG) = $6,000 (NSTCG). |
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Ms. Crocker bought 1,000 shares of EMO Corporation stock for $10,000 on January 20, 2012. On December 28, 2014 she sold all 1,000 shares of her EMO stock for $9,000. Based on a hot tip from her friend, she bought 1,000 shares of EMO stock on January 15, 2015 for $7,000. What is Ms. Crocker's recognized loss on her 2014 sale and what is her basis in her 1,000 shares purchased in 2015? |
$0 LTCL and $8,000 basis $9,000 amount realized from EMO sale – $10,000 tax basis in Ibis shares = $1,000 realized loss on sale of EMO stock. Loss is not currently deductible because the EMO shares were reacquired within 30 days of the original sale. $1,000 nondeductible loss from original EMO sale + $7,000 purchase price for new EMO shares = $8,000 tax basis in new EMO shares. |
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If an individual taxpayer's marginal tax rate is 33 percent and he holds the following assets for more than a year, which gains will be taxed at the lowest rate at the time of sale? |
gains from personal-use property |
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What explicit tax rate would keep Orlando indifferent between purchasing a municipal bond with a 4.0 percent return and a taxable bond with a 5.5 percent before-tax return? |
31.2% .055 x (1-tax rate) = .04; tax rate = 27.3 percent. |
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Investment interest expense includes: |
interest expense from loans to purchase corporate bonds. and interest expense from loans to purchase stocks. |
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a debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. |
Bonds |
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3 types of bonds |
-corporate -U.S. Treasury bonds -U.S. savings bonds. |
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Taxpayers who haven’t adequately tracked the basis in their stock are required to use what method to determine the basis of the shares they sell? |
the first-in first-out (FIFO) method |
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2 Tax rates for capital gains |
28% and 25% |
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Unrecaptured §1250 gains are taxed at a maximum rate of what percent? |
25% |
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Gains from collectibles and from qualified small business stock not held for 5 years are taxed at a maximum rate of what percent? |
28% |
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the sale of an investment if that same investment (or substantially identical investment) is purchased within 30 days before or after the sale date. Losses are deferred. |
Wash sales |
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a state-sponsored program designed to help parents finance education expenses by generating tax-free income. are administered by certain investment companies and are subject to contribution requirements and investment guidelines. |
529 plan |
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Compare taxable bonds to municipal bonds |
Investors generally earn a lower rate of return (implicit tax) than on comparable corporate bonds.
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saving accounts that are for K-12 and higher education costs. Maximum $2,000 contribution phases out for AGI between $190,000 and $220,000 for married filing jointly taxpayers and $95,000 and $110,000 for other taxpayers. |
Coverdell Savings accounts |
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what life insurance policy is an investment? |
whole life insurance |
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(for determining deductibility of investment interest expense) gross investment income reduced by deductible investment expenses. |
Net investment income |
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what happens to unused investment interest expense? |
carries forward indefinitely. |
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Order of loss limitation rules |
- The tax basis - THE at-risk - the passive loss limits |
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Adjustments to tax basis and at-risk amounts |
if both are the same, when the tax basis hurdle is cleared, so is the at-risk hurdle. if the amounts differ then the at-risk amount will be less than the tax basis |
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3 categories for Material participation |
- Passive activity income or loss -Portfolio income -Active business income |
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Generally, the tax law provides more incentives for renters than homeowners. true/false |
false |
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A personal residence is a capital asset. true/false |
true |
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A taxpayer can only exclude gain on the sale of their current personal residence (the residence the taxpayer is living in at the time of the sale). true/false |
false |
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As a general rule, at most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every two years. true/false |
true |
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The maximum deductible amount of qualified residence interest is indexed for inflation (it increases each year). true/false |
false |
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For regular tax purposes, interest expense on a home equity loan is deductible only to the extent that the proceeds were used to substantially improve the home. true/false |
false |
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Taxpayers claiming a first-time home buyer tax credit for a home purchase in 2008 are required to pay back the credit even if they continue to live in the home as their personal residence. true/false |
true |
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Taxpayers with a qualifying home office can compute their home office expense using the actual expense method or the simplified method. Taxpayers can choose to use one method for one year and the other method for the next. true/false |
true |
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The Johnsons have a second home that was available to rent for three full weeks (28 days) during the summer. Of the twenty eight days, the Johnsons rented it to unrelated tenants for 16 days at fair market value. In addition, the Johnsons rented the home to the Florians for four days. Because they are family friends, the Florians only paid half the market rate for the rent. The Johnsons also rented the home for five days to the Smiths. The Smiths paid full fair market value rent even though they are related to the Johnsons. How many days did the Johnsons use the home for rental purposes during the year? |
16 Days when the home is available for rent, but not rented, count as neither personal nor rental days. Renting to relatives is deemed personal use regardless of rent paid. Renting at less than fair market value is deemed personal not rental use. |
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How is depreciation expense on a residence with significant rental use (vacation home) allocated to rental use? |
Depreciation expense × [number of rental days/(number of rental days + number of personal use days)] The expense is always allocated based on the number of days used (this is true for both the IRS and the Tax Court method of allocating expenses). |
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Aubrey bought her house for $150,000 and moved into it four years ago. Last November 1, she married Dave and he moved in with her. This November 1, they have decided to sell because prices in the neighborhood have skyrocketed. If they sell the house for $550,000, how much of the gain are they allowed to exclude? |
$250,000 Because there are no hardship circumstances and Dave does not meet the use test, they can use only Aubrey's exclusion of $250,000. |
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Mary purchased a home in 2011 for $200,000. She made a 20-percent down payment and financed the rest with a 15 year loan at six percent. In 2011, she took out a $20,000 home equity loan and used the proceeds to go on a trip around the world. In 2014, her interest payments were $9,600 on her mortgage and $1,400 on her home equity loan. What amount can she deduct in 2014 as an itemized deduction? |
$11,000 The interest on the home equity loan is deductible regardless of what the proceeds are used for. |
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Which of the following statements regarding who gets to deduct the real property taxes when real property is sold mid-year is correct? |
The deduction is pro-rated based on the number of days owned. The buyer is allocated the day of the sale. |
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Which of the following best describes the home office deduction of a self-employed taxpayer? |
For AGI, limited to gross income from the business The deduction is a business expense and is deductible for AGI. However, the deduction may not exceed the income generated from that activity. |
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Tricia purchased a home on January 1, 2014 for $650,000 by making a down payment of $150,000 and financing the remaining $500,000 with a 30-year loan, secured by the residence, at 7 percent. During 2014 Tricia made interest-only payments on the loan of $35,000. On July 1, 2014, when her home was worth $700,000, Tricia borrowed an additional $75,000 secured by the home at an interest rate of 9 percent. She used the loan proceeds for purposes unrelated to the home. During 2014, she made interest-only payments of her loan in the amount of $3,375. What amount of the $38,375 interest expense Tricia paid during 2014 may she deduct as an itemized deduction? |
$38,375 Because the amount of home acquisition indebtedness is under $1,000,000 and the amount of home equity indebtedness is under $100,000, the full $38,375 of interest payments on both loans is deductible. |
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September 1, 2014, Jackson borrowed $400,000 to refinance the original mortgage on her principal residence. Jackson paid 2 points to reduce her interest rate from 7.5 percent to 7 percent. The loan is for a 30-year period. How much can Mary deduct in 2014 for her points paid? |
$89 $8,000/360 × 4 = $ 89 |
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Tests for exclusion of gain from sale of person residence (and exceptions) |
-Must meet ownership and use tests. -Must own home for at least two of five years before sale. -Must use home as principal residence for at least two of five years before sale. -For married couples to qualify for maximum exclusion on a joint return, one spouse must meet ownership test and both spouses must meet use test. |
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Deductible home mortgage interest |
-allowed to deduct the interest on home mortgage loans - can generate significant tax savings and reduce the after-tax cost of mortgage payments. -exceeds the standard deduction, thus allowing taxpayers to claim other itemized deductions. |
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3 Rules for personal use / rental use of home (be able to calculate amounts for income, losses, deductions, etc.) |
-Residence with minimal rental use (personal residence) -Residence with significant rental use (vacation home) -Nonresidence (rental property) |
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(rents home for 14 or fewer days). |
Residence with minimal rental use (personal residence) |
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(rents home for 15 or more days). |
Residence with significant rental use |
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one percent of the principal amount of the loan. |
Points paid on home acquisition |
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Real property tax deduction |
deductible by taxpayers conducting self-employment activities against business income |
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Deductibility of home office expenses |
a taxpayer must use her home—or part of her home—exclusively and regularly as either The principal place of business for any of the taxpayer's trade or businesses, or As a place to meet with patients, clients, or customers in the normal course of business. |
