REG Unit 2

Hall, a divorced person and custodian of her 12-year-old child, filed her Year 9 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her Year 9 return:

In June, Year 9, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock, which she bought in Year 1, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July, Year 9 for $3,500. The donor paid no gift tax. What was Hall's reportable gain or loss in Year 9 on the sale of the 100 shares of stock gifted to her?

a. $500 loss

b. $0

c. $500 gain

d. $1,000 loss

b. $0

If the executor of a decedent's estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent's death?

a. 6

b. 9

c. 12

d. 3

a. 6

Fred Berk bought a plot of land with a cash payment of $40,000 and a mortgage of $50,000. In addition, Berk paid $200 for a title insurance policy. Berk's basis in this land is:

a. $90,000

b. $40,200

c. $90,200

d. $40,000

c. $90,200

Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition?

a. $1,300

b. $2,500

c. $0

d. $1,100

a. $1,300

Alice gifted stock to her son, Bob, in Year 5. Alice bought the stock in Year 1 for $8,300. The value of the stock on the date of gift was $13,400. Bob sold the stock in Year 7 for $15,800. What is Bob’s recognized gain or loss on the sale in Year 7?

a. $0

b. $2,400 gain

c. $7,500 gain

d. $15,800 gain

c. $7,500 gain

Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of Arden sold?

a. $5,000

b. $6,000

c. $6,200

d. $6,500

a. $5,000

Allen owns 100 shares of Prime Corp., a publicly traded company, which Allen purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, Year 3, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for Year 3?

a. $300

b. $2,000

c. $750

d. $1,500

d. $1,500

Parrot received land as a gift with a fair market value of $5,000. The land was purchased by the donor for $8,000. The land is sold for $6,000. What amount of gain should be reported?

a. $3,000

b. $2,000

c. $1,000

d. $0

d. $0

Simmons gives her child a gift of publicly traded stock with a basis of $40,000 and a fair market value of $30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child’s recognized gain or loss, if any?

a. $6,000 gain

b. $4,000 loss

c. $36,000 gain

d. no gain or loss

d. no gain or loss

Parent gave securities with an adjusted basis of $10,000 and fair market value of $9,000 to a child. Later the child sold the securities for $7,000. What is the child's basis for the securities sold?

a. $7,000

b. $9,000

c. $10,000

d. $0

b. $9,000

Lemon owned 2,000 shares of Spectrol Corp. common stock that were purchased in Year 1 at $10.50 per share. In Year 4, Lemon received a 5 percent nontaxable dividend of Spectrol common stock. In Year 5, the stock split 2-for-1. In the current year, Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?

a. $16,800

b. $8,000

c. $8,400

d. $4,000

d. $4,000

Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett's basis in the equipment?

a. $36,000

b. $32,000

c. $31,000

d. $35,000

c. $31,000

A taxpayer received a painting valued at $8,000 as a gift. The donor purchased the painting a year earlier for $4,500 and paid no gift tax on the transfer. Nine months later, the taxpayer sold the painting for $9,000. What is the amount and classification of the capital gain?

a. $1,000 short-term

b. $4,500 short-term

c. $4,500 long-term

d. $1,000 long-term

c. $4,500 long-term

A taxpayer gifted stock held for two years to the taxpayer's adult child. The taxpayer's basis was $120,000 and the fair market value of the stock at the time of the gift was $125,000. Six months later, the taxpayer's child sold the stock for $110,000. What is the amount and character of the gain (loss), if any, to be reported on the child's tax return?

a. $10,000 long-term capital loss

b. $10,000 short-term capital loss

c. $15,000 long-term capital loss

d. $15,000 short-term capital loss

a. $10,000 long-term capital loss

An individual shareholder held 100 shares of a corporation's stock with a $4,000 total basis. During the year, the shareholder received a cash dividend of $300 and a stock dividend of 10%. What amount, rounded to the nearest dollar, is the shareholder's cost basis in each share of stock at the end of the year?

a. $37

b. $34

c. $36

d. $39

c. $36

A corporation's stock price has risen to $750 per share. In order to lower the market price to a more affordable amount, the corporation executed a 3-for-1 stock split. Which of the following statements regarding each shareholder's basis in the corporation's stock is correct?

a. the total basis and the per-share basis will both increase

b. the total basis will remain the same

c. the total basis and the per-share basis will both decrease

d. the per-share basis will remain the same

b. the total basis will remain the same

If the executor of a decedent's estate elects the alternate valuation date and the property included in the gross estate is sold 3 months after the decedent's death, the estate assets must be valued as of how many months after the date of death?

a. 12

b. 9

c. 6

d. 3

d. 3

On February 1, Year 4, Hall learned that he was bequeathed 500 shares of common stock under his father's will. Hall's father had paid $2,500 for the stock in Year 1. Fair market value of the stock on February 1, Year 4, the date of his father's death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, Year 4, the date that the executor distributed the stock to him. How much income should Hall include in his Year 4 individual income tax return for the inheritance of the 500 shares of stock, which he received from his father's estate?

a. $0

b. $2,500

c. $4,000

d. $5,500

a. $0

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares of the stock to another of Carter's relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon's basis in the 100 shares of stock when acquired on June 1?

a. $10,000

b. $5,000

c. $15,000

d. $5,100

b. $5,000

A beneficiary acquired property from a decedent. The fair market value at the date of the decedent's death was $100,000. The decedent had paid $130,000 for the property. Estate taxes attributed to the property were $2,000. The beneficiary sold the property two years after receipt from the estate. What is the basis of the property for the beneficiary?

a. $102,000

b. $100,000

c. $130,000

d. $132,000

b. $100,000

In Year 4, a taxpayer gifted an undivided one-half interest in the taxpayer's farm to the taxpayer's child. Title to the farm was held by parent and child as tenants in common. In Year 10, the taxpayer died and the other one-half interest in the farm was left to the same child. The taxpayer paid $40,000 for the farm in Year 1, and the fair market value of the entire farm was $100,000 at the date of the taxpayer's death. An alternate valuation date was not elected. What is the child's basis in the farm after the taxpayer's death?

a. $100,000

b. $40,000

c. $70,000

d. $0

c. $70,000

In the current year, Madison inherited investment property from a parent's estate with a fair market value of $200,000. The parent had a basis in the asset of $100,000. Madison sold the property for $150,000 in the year the parent died. What is Madison's gain or loss on the sale?

a. $50,000 long-term loss

b. $50,000 short-term loss

c. $50,000 long-term gain

d. $50,000 short-term gain

a. $50,000 long-term loss

A decedent's estate included 100 shares of stock in a publicly traded company originally purchased at a cost of $10 per share. The valuation at the date of death on January 15, Year 10, was $100 per share. The stock was distributed to the estate's sole beneficiary on March 31, Year 10, and the beneficiary immediately sold the stock for $110 per share. What is the amount and character of the gain realized by the beneficiary on the sale of the stock?

a. $1,000 short-term capital gain

b. $1,000 long-term capital gain

c. $10,000 long-term capital gain

d. $10,000 short-term capital gain

b. $1,000 long-term capital gain

A taxpayer received shares of stock in a publicly traded company from the estate of the taxpayer's parent. The parent had held the shares for three months before death, when they transferred to the parent's estate. The estate held the shares for two months and transferred them to the taxpayer, who sold them within one month. Under federal tax law, the taxpayer is deemed to have held the shares for:

a. six months

b. one month

c. more than one year

d. three months

c. more than one year

As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal property costing up to $8,000. Wolf does not have an applicable financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the de minimis safe harbor rule, how much can Wolf deduct for tax purposes in Year 3?

a. $7,500

b. $4,000

c. $0

d. $12,000

c. $0

Luisa Gomez is starting a lawncare business and is converting her personal use riding lawn mower to business use. The mower cost $2,500 when she purchased it two years ago, and it is now worth $1,500. What is Luisa’s tax basis for depreciation for the mower?

a. $0

b. $2,500

c. $1,500

d. $1,000

c. $1,500

Luisa Gomez converted her personal use riding lawn mower to business use when she started her lawncare business. The mower cost $2,500, and it was worth $1,500 on the date of conversion. After taking $500 in depreciation deductions, Luisa sold the mower for $800. What is Luisa’s tax basis in the mower for purposes of calculating gain or loss?

a. $1,000

b. $2,500

c. $1,500

d. $2,000

a. $1,000

Luisa Gomez converted her personal use riding lawn mower to business use when she started her lawncare business. The mower cost $2,000, and it was worth $1,500 on the date of conversion. After taking $1,500 in depreciation deductions, Luisa sold the mower for $800. What is Luisa’s tax basis in the mower for purposes of calculating gain or loss?

a. $500

b. $2,000

c. $0

d. $1,500

a. $500

Prior to the incorporation and beginning of a new business, a taxpayer spent $15,000 in legal fees to establish the business as a corporation. Which of the following statements is correct regarding the tax treatment of the legal fees?

a. they are organizational expenses with a basis of $15,000 that may, if elected, be deductible up to $5,000 in the year the corporation begins its business, with the remaining amortized over a 15-year period

b. they are start-up expenses with a basis of $15,000 that must be capitalized in full and deducted over a 10-year period beginning in the year the corporation begins business

c. they are start-up expenses that must be capitalized until the corporation is terminated, at which time they are deductible on the corporation’s final federal income tax return

d. they are organizational expenses that are fully deductible in the year paid or incurred

a. they are organizational expenses with a basis of $15,000 that may, if elected, be deductible up to $5,000 in the year the corporation begins its business, with the remaining amortized over a 15-year period

Gray Corp., a calendar-year C corporation, was incorporated on January 1, Year 2, and began business on July 1. Gray incurred the following expenses between January 1 and July 1, Year 2:

Description	Amount
Costs of issuing stock	$10,000
Advertising for business opening	$7,000
Cost of analysis of potential markets	$4,000
Interest on corporate loans	$6,000
Training of employees	$12,000

What is the total amount of amortizable start-up expenditures in Year 2?

a. $23,000

b. $32,000

c. $17,000

d. $27,000

a. $23,000

As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal property costing up to $8,000. Wolf also has an applicable financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the de minimis safe harbor rule, how much can Wolf deduct for tax purposes in Year 3?

a. $4,000

b. $0

c. $7,500

d. $12,000

d. $12,000

Lee qualified as head of a household for Year 9 tax purposes. Lee's Year 9 taxable income was $100,000, exclusive of capital gains and losses. Lee had a net long-term capital loss of $8,000 in Year 9. What amount of this capital loss can Lee offset against Year 9 ordinary income?

a. $3,000

b. $0

c. $4,000

d. $8,000

a. $3,000

Judy and Kevin Kales had the following stock sales during the current taxable year:

	Gross Proceeds	Basis
Crispy Crunch, Inc.	4,000	5,000
Summer Solstice, Inc.	3,500	3,000
Sealy & Sealy, Inc.	2,000	10,000

Each stock was held for over 12 months. What amount should be reported on their current year tax return for capital gain/loss?

a. $0

b. $3,000 loss

c. $500 income

d. $8,500 loss

b. $3,000 loss

Winkler, a CPA, provided accounting services to a client, Thompson. On December 15 of the same year, Thompson gave Winkler 100 shares of Foster Corp. as compensation for services. The adjusted basis of the stock was $4,000, and its fair market value at the time of transfer was $5,000. Two months later, Winkler sold the stock on February 15 for $7,500. What is the amount that Winkler should recognize as gain on the sale of stock?

a. $0

b. $1,000

c. $2,500

d. $5,000

c. $2,500

Johnson borrowed $45,000 secured by land with a basis of $20,000. Johnson could not pay the principal, so the bank foreclosed and sold the land for $35,000 as full settlement of the debt. What income should Johnson recognize?

a. $15,000

b. $10,000

c. $25,000

d. $35,000

c. $25,000

O'Brien purchased two automobiles for personal use. Automobile 1 had an adjusted basis of $20,000, and automobile 2 had an adjusted basis of $10,000. O'Brien sold automobile 1 for $15,000 and automobile 2 for $15,000. What gain or loss should O'Brien recognize on the sales of the automobiles?

a. automobile 1, loss of $5,000; automobile 2, gain of $0

b. automobile 1, loss of $0; automobile 2, gain of $5,000

c. automobile 1, loss of $5,000; automobile 2, gain of $5,000

d. automobile 1, loss of $0; automobile 2, gain of $0

b. automobile 1, loss of $0; automobile 2, gain of $5,000

An individual purchased 1,000 shares of stock for $8,000. Four hundred shares were sold for $13,000 after a two-for-one stock split. What amount of capital gain should the individual recognize? 

a. $9,800

b. $5,000

c. $11,400

d. $9,000

c. $11,400

Capital assets include:

a. a corporation’s accounts receivable from the sale of its inventory

b. a manufacturing company’s investment in U.S. Treasury bonds

c. a corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers

d. seven-year MACRS property used in a corporation’s trade or business

b. a manufacturing company’s investment in U.S. Treasury bonds

Which of the following sales should be reported as a capital gain?

a. government bonds sold by an individual investor

b. sale of inventory

c. real property subdivided and sold by a dealer

d. sale of equipment used in a trade or business

a. government bonds sold by an individual investor

Which of the following items is a capital asset?

a. an automobile for personal use

b. real property used in a trade or business

c. depreciable business property

d. accounts receivable for inventory sold

a. an automobile for personal use

Which of the following is a capital asset?

a. inventory held primarily for sale to customers

b. accounts receivable

c. a computer system used by the taxpayer in an accounting business

d. land held as an investment

d. land held as an investment

Marsha and Brad, married taxpayers filing jointly, had the following transactions during Year 9:

Gain on sale of stock purchased in Year 1 and sold in June, Year 9	3,000
Ordinary income from employers	80,000
Loss on sale of stock purchased in January, Year 9 and sold in March, Year 9	20,000

What is the amount of the capital loss carryover to Year 10?

a. $14,000

b. $0

c. $17,000

d. $20,000

a. $14,000

An individual taxpayer reported the following net long-term capital gains and losses:

Year	Gain (loss)
1	$(5,000)
2	1,000
3	4,000

The amount of capital gain that the individual taxpayer should report in Year 3 is:

a. $1,000

b. $4,000

c. $3,000

d. $0

b. $4,000

On February 1, year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co. for $200 per share. The taxpayer purchased the option for $50,000, which was to remain in effect for six months. The market declined, and the taxpayer let the option lapse on August 1, year 1. The taxpayer would report which of the following as a capital loss on the year 1 income tax return?

a. $50,000 short term

b. $150,000 long term

c. $200,000 short term

d. $50,000 long term

a. $50,000 short term

An individual reports the following capital transactions in the current year:

Short-term capital gain	1,000
Short-term capital loss	(11,000)
Long-term capital gain	10,000
Long-term capital loss	(6,000)

What amount is deducted in arriving at adjusted gross income?

a. $10,000

b. $6,000

c. $3,000

d. $0

c. $3,000

An individual acquired 500 shares of stock on December 20, Year 1, for a personal portfolio. On March 15, Year 2, the individual executed a short sale of 500 shares of the stock. On December 21, Year 2, the individual delivered the 500 shares to cover the short sale. Which of the following statements best characterizes the gain or loss on the short sale?

a. the transaction will be treated as a long-term capital asset sale

b. the transaction will be treated as a 40% short-term/60% long-term capital asset sale

c. the transaction will be treated as ordinary income because of the March short sale

d. the transaction will be treated as a short-term capital asset sale

d. the transaction will be treated as a short-term capital asset sale

A cash-basis taxpayer made a bona fide, nonbusiness loan to an acquaintance in Year 1. At the end of Year 2, it is determined that the taxpayer will likely be able to collect only 20 percent of the principal, and no interest has been or will be collected. How should the loss be treated for tax purposes in Year 2?

a. 80% of the principal, but none of the interest, is deductible in Year 2

b. 80% of the principal and 80% of the interest are deductible in Year 2

c. 80% of the principal, up to $3,000, is deductible in Year 2

d. none of the loss is deductible in Year 2

d. none of the loss is deductible in Year 2

Decker, an individual, owns 100 percent of Acre, an S corporation. At the beginning of the year, Decker's basis in Acre was $25,000. Acre had ordinary income during the year in the amount of $10,000 and a long-term capital loss in the amount of $4,000. Decker has no other capital gains or losses during the year. What amount of the long-term capital loss may Decker deduct this year?

a. $4,000

b. $3,000

c. $0

d. $1,000

b. $3,000

Emmett loaned Baker $10,000. Baker filed for bankruptcy last year, and Emmett was notified that Emmett would receive $0.20 on the dollar. In the current year, Emmett received $1,500 as the final settlement. The loan is nonbusiness. How should Emmett report the loss?

a. $8,50 short-term capital loss in the current year

b. $8,000 short-term capital loss last year and $500 ordinary loss in the current year

c. $8,500 ordinary loss in the current year

d. $8,000 short-term capital loss last year and $500 capital loss in the current year

a. $8,50 short-term capital loss in the current year

An individual had the following capital gains and losses for the year:

Short-term capital loss	70,000
Collectibles gain (28% rate)	66,000
Long-term gain (15% rate)	20,000

What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)?

a. long-term gain of $16,000 at the 15% rate

b. short-term loss of $3,000 at the ordinary rate, long-term capital gain of $10,000 at the 15% rate, collectibles gain of $66,000 at the 28% rate

c. short-term loss of $3,000 at the ordinary rate and long-term capital gain of $86,000 at the 15% rate

d. collectibles gain of $16,000 at the 28% rate

a. long-term gain of $16,000 at the 15% rate

A taxpayer reports the following capital gains and losses:

Description	Amount
Short-term capital loss	($3,000)
Short-term capital gain	$1,000
Long-term capital loss	($2,000)
Long-term capital gain	$5,000

What is the amount and character of the taxpayer's net gain?

a. $3,000 short-term capital gain

b. $1,000 long-term capital gain

c. $1,000 short-term capital gain

d. $3,000 long-term capital gain

b. $1,000 long-term capital gain

Aqua Corp. had an operating income of $500,000 and operating expenses of $350,000 in the current year. Aqua had a long-term capital gain of $30,000 and a $50,000 short-term capital loss. What is Aqua's taxable income for the current year?

a. $150,000

b. $147,000

c. $180,000

d. $130,000

a. $150,000

A corporate taxpayer's capital gains and losses are as follows:

Short-term capital gain	7,000
Short-term capital loss	(43,000)
Long-term capital gain	9,000
Long-term capital loss	(21,000)

 What amount of capital loss deduction is the taxpayer entitled to use to offset against ordinary income?

a. $48,000

b. $3,000

c. $12,000

d. $0

d. $0

Baker Corp., a calendar year C corporation, realized taxable income of $36,000 from its regular business operations for the calendar year. In addition, Baker had the following capital gains and losses during the year.

Short-term capital gain	8,500
Short-term capital loss	(4,000)
Long-term capital gain	1,500
Long-term capital loss	(3,500)

Baker did not realize any other capital gains or losses since it began operations. What is Baker's total taxable income for the year?

a. $46,000

b. $40,500

c. $42,000

d. $38,500

d. $38,500

A C corporation has the following capital gains and capital losses for Years 1 and 2:

	Capital Gains	Capital Losses
Year 1	$250,000	$300,000
Year 2	425,000	350,000

If the C corporation had no capital gains or losses prior to Year 1, what is the minimum net capital gain that can be reported for Year 2?

a. $50,000

b. $425,000

c. $75,000

d. $25,000

d. $25,000

A C corporation has a net loss from operations of $500,000; a long-term capital gain of $20,000; and a short-term capital loss of $50,000 for the current year. What is the corporation's loss for the year?

a. ($497,000)

b. ($483,000)

c. ($500,000)

d. ($530,000)

c. ($500,000)

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on December 15, Year 1, for $13,000. What amount of loss from the sale of Core's stock is deductible on Smith's Year 1 and Year 2 income tax returns?

		Year 1	Year 2
	A.	$0	$2,000
	B.	$2,000	$0
	C.	$0	$0
	D.	$1,000	$1,000

c. $0, $0

On year 1, Janice had the following transactions in Jacky, Inc. common stock:

	Shares	Price
Jan. 01 – Purchase	500	$25
May 12 – Sale	500	$23
May 28 – Purchase	250	$22
Oct. 15 – Sale	100	$18

What is Janice's deductible capital loss?

a. $1,100

b. $400

c. $700

d. $1,400

a. $1,100

During the current year, an individual taxpayer completed the following stock transactions related to Alpha Corp. stock:

Date	Shares Traded	Price/Share
May 15	1,000 purchased	$18
June 1	1,000 purchased	$12
June 10	1,000 sold	$10

The 1,000 shares sold on June 10 had been purchased on May 15. What is the maximum amount, if any, that the taxpayer can deduct in the current year?

a. $0

b. $2,000

c. $3,000

d. $8,000

a. $0

A married couple abandoned their principal residence in May. They had purchased the house five years ago for $350,000. The house had a current fair market value of $300,000. What is the maximum loss, if any, that they are allowed to deduct on the current-year's tax return for the abandoned property?

a. $50,000

b. $300,000

c. $0

d. $350,000

c. $0

Talbot purchased a laptop for $1,500 and a television for $1,300. The laptop is used solely for business and the television solely for personal entertainment. During the same year, Talbot experienced serious financial difficulty and sold the television for $300 and the laptop for $1,000. What amount, if any, is Talbot entitled to deduct as a loss relating to the sale of the television and laptop?

a. $0

b. $500

c. $1,000

d. $1,500

b. $500

In Year 7, an individual taxpayer sold for $200,000 the taxpayer's principal residence, which had been purchased for $250,000 in Year 1. The taxpayer then purchased a new residence for $190,000. What amount of gain or loss, if any, should the taxpayer report on the Year 7 tax return?

a. $0 gain and $0 loss

b. $60,000 capital loss

c. $10,000 capital gain

d. $50,000 capital loss

a. $0 gain and $0 loss

On August 1, Year 1, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in Year 1?

a. $9,600

b. $3,600

c. $2,250

d. $6,000

c. $2,250

Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986:

a. the recovery period for depreciable real property must be 27.5 years

b. no type of straight-line depreciation is allowable

c. salvage value is ignored for purposes of computing the MACRS deduction

d. used tangible depreciable property is excluded from the computation

c. salvage value is ignored for purposes of computing the MACRS deduction

Rock Crab, Inc. purchases the following assets during the year:

Computer	3,000
Computer desk	1,000
Office furniture	4,000
Delivery van	25,000

What should be reported as the cost basis for MACRS five-year property?

a. $25,000

b. $3,000

c. $28,000

d. $33,000

c. $28,000

A C corporation purchased a new laptop computer for $3,000 for use in the taxpayer's business. What is the MACRS recovery period for the computer?

a. 10 years

b. 3 years

c. 5 years

d. 6 years

c. 5 years

With regard to depreciation computations made under the general MACRS method, the half-year convention provides that:

a. the deduction will be based on the number of months the property was in service, so that one-half month’s depreciation is allowed for the month in which the property is placed in service and for the month in which it is disposed of

b. deprecation will be allowed in the last year of the property’s economic life only if the property is disposed of after June 30 of the year of disposition for calendar-year corporations

c. depreciation will be allowed in the first year of acquisition of the property only if the property is placed in service no later than June 30 for calendar-year corporations

d. one-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year’s depreciation is allowed for the year in which the property is disposed of

d. one-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year’s depreciation is allowed for the year in which the property is disposed of

Fender has a Schedule C auto repair business. In the first year of operations, Fender purchased diagnostic equipment that cost $75,000 and power tools that cost $10,000. Fender elected to expense the $10,000 of power tools in Year 1 according to Section 179 (Election to Expense Certain Depreciable Business Assets). Both the diagnostic equipment and power tools have a seven-year class life. The double-declining balance MACRS depreciation rates for seven-year property using half-year convention are as follows:

Recovery year	Depreciation rate
1	0.1429
2	0.2449
3	0.1749
4	0.1249
5	0.0893
6	0.0892
7	0.0893
8	0.0446

What amount of depreciation expense should Fender report in Year 2?

a. $18,367.50

b. $10,717.50

c. $12,146.50

d. $20,816.50

a. $18,367.50

Data Corp., a calendar year corporation, purchased and placed into service office equipment during November Year 1. No other equipment was placed into service during Year 1. Under the general MACRS depreciation system, what convention must Data use?

a. mid-month

b. mdi-quarter

c. half-year

d. full-year

b. mdi-quarter

Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under Internal Revenue Code Section 179, the cost of tangible depreciable personal property?

I. the property must be purchased for use in the taxpayer’s active trade or business

II. the property must be purchased from an unrelated party

a. neither I nor II

b. I only

c. II only

d. both I and II

d. both I and II

Dove Corp. began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. In the current year, the land had a fair market value of $60,000. Dove paid real estate taxes of $5,000 in the current year. What is the total depreciable basis of Dove's business property?

a. $100,000

b. $160,000

c. $150,000

d. $155,000

a. $100,000

A taxpayer purchased five acres of land for $20,000 and placed in service other depreciable personal property that cost $100,000. Disregarding business income limitations, what maximum amount of cost recovery can the taxpayer claim this year?

a. $100,000

b. $120,000

c. $20,000

d. $116,000

a. $100,000

Manufacturing Corp. replaced much of its aging equipment in the current year at a total cost of $1,000,000. In addition, the corporation also purchased land worth $300,000 on which to build a second manufacturing plant. These are the only two assets that Manufacturing Corp. acquired and placed in service in the current year.

Disregarding any limitations, what is the maximum Section 179 expense that the corporation can deduct this year?

a. $300,000

b. $1,000,000

c. $1,300,000

d. $0

b. $1,000,000

Jenny is an individual taxpayer who operates a fashion retail business as a sole proprietor. Jenny purchased a new brick-and-mortar store during the year for $300,000. Unfortunately, after Jenny had moved in and started operating her business from the new location, she discovered that the building needed a new roof. She had the roof replaced at a cost of $20,000. In addition, Jenny purchased $15,000 worth of furniture for the store. Finally, Jenny converted her personal laptop into a solely business-use laptop. At the date of the conversion, the laptop's depreciable basis was $1,000.

How much can Jenny deduct as a Section 179 expense deduction, assuming that these are the only assets that Jenny acquired and placed in service during the taxable year?

a. $35,000

b. $36,000

c. $336,000

d. $335,000

a. $35,000

Holly owns a commercial property that she rents to small businesses. During the current year, Holly made numerous improvements to the building. Early in the year, Holly replaced the building's elevator for $60,000. In the middle of the year, Holly replaced the roof for a cost of $30,000. Finally, Holly replaced all of the common area furniture in the building at a total cost of $20,000.

How much can Holly deduct as a Section 179 expense deduction, assuming the Section 179 taxable income limitation does not apply?

a. $0

b. $50,000

c. $20,000

d. $110,000

b. $50,000

Landlord Inc. owns a series of commercial properties throughout the country. During the current taxable year, Landlord made numerous improvements to their buildings. First, Landlord replaced all of the escalators in their buildings for a total cost of $300,000. Landlord also replaced the roof at its signature property for a cost of $800,000. Finally, Landlord replaced the lobby furniture at all of its properties for a total cost of $1,000,000.

How much can Landlord deduct in the current year as a Section 179 expense deduction, assuming any Section 179 limitations do not apply?

a. $2,100,000

b. $1,100,000

c. $1,800,000

d. $300,000

c. $1,800,000

This year, Jane inherited business equipment from a deceased relative. At the time of the relative's death, the equipment had a fair market value of $40,000 and an adjusted basis of $5,000. Assuming that this was the only asset that Jane placed in service in her business this year, what is Jane's Section 179 expense deduction?

a. $35,000

b. $0

c. $40,000

d. $5,000

b. $0

This year, Jane acquired business equipment from a generous relative who gifted her the asset. At the time of the gift, the equipment had a fair market value of $40,000 and an adjusted basis of $5,000. Assuming that this was the only asset that Jane placed in service in her business this year, what is the amount of Jane's Section 179 expense deduction for the current year?

a. $40,000

b. $5,000

c. $35,000

d. $0

d. $0

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year?

a. $3,000

b. $8,000

c. $16,000

d. $6,000

b. $8,000

Xylo, a calendar year C corporation, acquired the assets of Yerkes, also a calendar year C corporation, on March 1 of the current year. One of the assets acquired was a trademark to which Xylo properly allocated $1,200,000 of the purchase price. What is Xylo's amortization deduction for the current year?

a. $120,000

b. $80,000

c. $66,667

d. $30,000

c. $66,667

On January 1, in connection with the purchase of all of the assets of Joe Swift's business, Fast, Inc. entered into a covenant not to compete with Joe for a period of five years, with an option by Joe to extend it to seven years. What is the amortization period of the covenant for tax purposes?

a. 5 years

b. 17 years

c. 15 years

d. 7 years

c. 15 years

Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:

Goodwill	50,000
Covenant not to compete	13,000

For federal income tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?

a. $63,000

b. $0

c. $13,000

d. $50,000

a. $63,000

ABC Industries, a C corporation, was incorporated on March 1, Year 2, and elected a calendar year-end. On April 15, Year 2, prior to commencing business operations, ABC purchased the assets of DEF Corp. for $350,000. Of this amount, $90,000 was allocated to goodwill. On May 1, Year 2, ABC commenced business operations. What amount of goodwill amortization can ABC claim on its Year 2 corporate tax return?

a. $6,000

b. $5,000

c. $4,250

d. $4,000

d. $4,000

On January 2, year 1, a corporation bought the assets of another business in a taxable acquisition, recognizing $240,000 of goodwill for both tax and book purposes. On January 3, year 3, the corporation sold the assets to a different company. What amount was the corporation's adjusted tax basis of goodwill at the time of the subsequent sale?

a. $0

b. $208,000

c. $224,000

d. $240,000

b. $208,000

New Brands, Inc. incurs $46,400 in qualifying organizational costs in Year 1. The business begins operations on September 15, Year 1. What amount of organizational costs will New Brands, Inc. deduct in Year 1?

a. $5,805

b. $5,920

c. $5,000

d. $1,031

b. $5,920

Lab Tech, Inc. incurred $50,000 of research and experimental costs within the U.S., which it appropriately capitalized, in Year 1. The costs were incurred in December Year 1. How much of the costs is Lab Tech, Inc. permitted to deduct in Year 1?

a. $833

b. $1,667

c. $5,000

d. $10,000

c. $5,000

Real Ventures Inc. incurred $3 million of loan issuance costs on January 1, Year 3, related to a mortgage that it obtained to finance the purchase of a commercial office building. The term of the mortgage is 20 years, and the recovery period of the building is 40 years. How much of the loan issuance costs can Real Ventures Inc. deduct in Year 3?

a. $200,000

b. $3,000,000

c. $150,000

d. $75,000

c. $150,000

A taxpayer purchases a patent from a competitor for $1 million on January 1, Year 3. The product for which the patent was issued is expected to be completed in five years, and the patent itself has a remaining life of 20 years. How much of the purchase price can the taxpayer deduct in Year 3?

a. $0

b. $66,667

c. $50,000

d. $200,000

c. $50,000