Income Tax - Chapter 6 Exam A+ Pass
Verified
1. Discuss the definition of trade or business. Why does it matter whether a taxpayer is
classified as an employee or as self-employed? - Answer- - A trade or a business has
(1) a profit motive and (2) a regular basis
- As a self-employed taxpayer they will receive form 1099-MISC and can take forAGI
deductions on Schedule C, while an employee receives a W-2 form from their employer
that has taxes withheld. Only a statutory employee receiving a W-2 with box 13
checked, can reduce their income with forAGI expenses
4. On what type of property is depreciation allowed? - Answer- Anything used in the
business except land
5. Discuss the word basis in relation to the financial accounting term book value. What
is meant by the term adjusted basis? - Answer- - Basis means cost
- Book Value = Adjusted basis = Cost - Acc. Depreciation
6. Discuss the difference between personal property and real property. Give examples
of each. - Answer- - Personal Property = includes equipment, furniture, and fixtures or
anything else that is not classified as real property (shorter useful lives)(have recovery
periods of 3, 5, and 7 yrs)
- Real Property = consists of land and buildings as well as any other structural
components attached to land. (have recovery periods of 27.5 years and 39 years)
1. Residencial and 2. non residential (longer useful life than residential)
7. What is a depreciation convention? What conventions are available under MACRS? -
Answer- when it was placed in service for depreciation date
1. Half-year
2. Mid-quarter
3. Mid-Month
8. When calculating depreciation for personal property (assuming the half-year
convention) using the IRS depreciation tables, does the taxpayer need to multiply the
first year table depreciation percentage by one-half? What about in the year of disposal,
assuming the property is disposed of prior to the end of its recovery period? - Answer- -
No, not unless it is disposed of prior to the end of its recovery period
11. Distinguish between travel and transportation expenses. - Answer- - Transportation
= traveling within home area; air, bus, rail, taxi, auto
(does not included commuting miles)
1. Standard mileage rate = 53.5 cents/mile (not the best)
2. Actual costs= depreciation, maintenance, tires, repairs, gas, oil, insurance, and
registration fees (all included in standard mileage rate)
, ** both methods deduct parking fees, tolls, property tax and interest on a car loan
- Travel = away from home & being away over night
12. When can a taxpayer use the standard mileage rate? Is the standard mileage rate
better than the actual auto costs? - Answer- The actual auto cost is better to use.
17. Trade or business expenses are treated as - Answer- a. A deduction for AGI.
19. Atlas, a financial consultant, had the following income and expenses in his business:
Fee income $235,000
Expenses:
1. Rent expense 18,000
2. Penalties assessed by the SEC 2,500
3. Office expenses 6,000
4. Supplies 6,000
5. Interest paid on note used to acquire office equipment 2,700
6. Speeding tickets going to see clients 650
How much net income must Atlas report from this business? - Answer- b. $202,300.
(18K+6K+6K+2.7K)
21. On May 5, 2012, Jill purchased equipment for $40,000 to be used in her business.
She did not elect to expense the equipment under § 179 or bonus depreciation. On
January 1, 2017, she sells the equipment to a scrap metal dealer. What is the cost
recovery deduction for 2017? - Answer- b. $1,784
Feedback: $40,000 x 8.92% x ½ = $1,784
22. On April 15, 2015, Andy purchased some furniture and fixtures (7-year property) for
$10,000 to be used in his business. He did not elect to expense the equipment under §
179 page 6-52or bonus depreciation. On June 30, 2017, he sells the equipment. What
is the cost recovery deduction for 2017? - Answer- b. $875.
23. Lawrence purchased an apartment building on February 10, 2017, for $330,000,
$30,000 of which was for the land. What is the cost recovery deduction for 2017? -
Answer- 330K -30K = 300K x .03182 = d. $9,546.
25. On June 30, 2017, Ken purchased an apartment building for $500,000. Determine
the cost recovery deduction for 2017: - Answer- 500K x .01970 = d. $9,850.
27. §179 expense is available for all of the following business assets except - Answer-
a. Office building. (no real property)
29. Which of the following is false with respect to the standard mileage rate? - Answer-
b. It includes parking fees, tolls, and property taxes on the vehicle.
Verified
1. Discuss the definition of trade or business. Why does it matter whether a taxpayer is
classified as an employee or as self-employed? - Answer- - A trade or a business has
(1) a profit motive and (2) a regular basis
- As a self-employed taxpayer they will receive form 1099-MISC and can take forAGI
deductions on Schedule C, while an employee receives a W-2 form from their employer
that has taxes withheld. Only a statutory employee receiving a W-2 with box 13
checked, can reduce their income with forAGI expenses
4. On what type of property is depreciation allowed? - Answer- Anything used in the
business except land
5. Discuss the word basis in relation to the financial accounting term book value. What
is meant by the term adjusted basis? - Answer- - Basis means cost
- Book Value = Adjusted basis = Cost - Acc. Depreciation
6. Discuss the difference between personal property and real property. Give examples
of each. - Answer- - Personal Property = includes equipment, furniture, and fixtures or
anything else that is not classified as real property (shorter useful lives)(have recovery
periods of 3, 5, and 7 yrs)
- Real Property = consists of land and buildings as well as any other structural
components attached to land. (have recovery periods of 27.5 years and 39 years)
1. Residencial and 2. non residential (longer useful life than residential)
7. What is a depreciation convention? What conventions are available under MACRS? -
Answer- when it was placed in service for depreciation date
1. Half-year
2. Mid-quarter
3. Mid-Month
8. When calculating depreciation for personal property (assuming the half-year
convention) using the IRS depreciation tables, does the taxpayer need to multiply the
first year table depreciation percentage by one-half? What about in the year of disposal,
assuming the property is disposed of prior to the end of its recovery period? - Answer- -
No, not unless it is disposed of prior to the end of its recovery period
11. Distinguish between travel and transportation expenses. - Answer- - Transportation
= traveling within home area; air, bus, rail, taxi, auto
(does not included commuting miles)
1. Standard mileage rate = 53.5 cents/mile (not the best)
2. Actual costs= depreciation, maintenance, tires, repairs, gas, oil, insurance, and
registration fees (all included in standard mileage rate)
, ** both methods deduct parking fees, tolls, property tax and interest on a car loan
- Travel = away from home & being away over night
12. When can a taxpayer use the standard mileage rate? Is the standard mileage rate
better than the actual auto costs? - Answer- The actual auto cost is better to use.
17. Trade or business expenses are treated as - Answer- a. A deduction for AGI.
19. Atlas, a financial consultant, had the following income and expenses in his business:
Fee income $235,000
Expenses:
1. Rent expense 18,000
2. Penalties assessed by the SEC 2,500
3. Office expenses 6,000
4. Supplies 6,000
5. Interest paid on note used to acquire office equipment 2,700
6. Speeding tickets going to see clients 650
How much net income must Atlas report from this business? - Answer- b. $202,300.
(18K+6K+6K+2.7K)
21. On May 5, 2012, Jill purchased equipment for $40,000 to be used in her business.
She did not elect to expense the equipment under § 179 or bonus depreciation. On
January 1, 2017, she sells the equipment to a scrap metal dealer. What is the cost
recovery deduction for 2017? - Answer- b. $1,784
Feedback: $40,000 x 8.92% x ½ = $1,784
22. On April 15, 2015, Andy purchased some furniture and fixtures (7-year property) for
$10,000 to be used in his business. He did not elect to expense the equipment under §
179 page 6-52or bonus depreciation. On June 30, 2017, he sells the equipment. What
is the cost recovery deduction for 2017? - Answer- b. $875.
23. Lawrence purchased an apartment building on February 10, 2017, for $330,000,
$30,000 of which was for the land. What is the cost recovery deduction for 2017? -
Answer- 330K -30K = 300K x .03182 = d. $9,546.
25. On June 30, 2017, Ken purchased an apartment building for $500,000. Determine
the cost recovery deduction for 2017: - Answer- 500K x .01970 = d. $9,850.
27. §179 expense is available for all of the following business assets except - Answer-
a. Office building. (no real property)
29. Which of the following is false with respect to the standard mileage rate? - Answer-
b. It includes parking fees, tolls, and property taxes on the vehicle.
