Deck 4: Business Income and Expenses, Part II

Question 1

When a residence is rented for less than 15 days during the year, the rental income is excluded from gross income.

Answer 1

True

Question 2

Passive losses of one activity may not be used to offset passive income from another activity.

Answer 2

False

Question 3

Selma owns a beach cottage that she rents to tourists. In 2015 she rented the cottage for 180 days. What is the maximum number of days Selma can use the cottage before her expense deduction will be limited to her gross rental income?​

A)​0 days
B)​9 days
C)​14 days
D)​18 days

Answer 3

D

Question 4

Passive losses are fully deductible as long as they do not exceed $50,000 during the year.

Question 5

Donald owns a two-family home. He rents out the first floor and resides on the second floor. The following expenses attributable to the total building were incurred by Donald for the year ended December 31, 2015: In addition, the depreciation attributable to the entire building would be $2,000. What is the total amount of the expenses that Donald can deduct on Schedule E of Form 1040 (before any limitations)?

A)$3,300
B)$3,850
C)$4,000
D)$4,700
E)None of the above

Question 6

Walt and Jackie rent out their residence in San Diego to friends for 10 days while they vacation in Europe. They collect $1,000 of rental income. How is the rental income treated on their tax return? Explain.

Question 7

If a residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, no allocation of expenses is required and the taxpayer may claim a deduction for the full amount of the expenses.

Question 8

Carmen owns a house that she rents out for $600 per month. Her expenses for the 2015 tax year are as follows:
Carmen bought the property in March of 1992, and her basis for depreciation on the house is $110,000. She uses straight-line depreciation with a 27 ½ -year life, so the depreciation on the house is $4,000. Calculate Carmen's net income or loss from renting the house if her gross rental income is $7,200 ($600 × 12 months).

Question 9

Bill is the owner of a house with two identical apartments. He resides in one apartment and rents the other apartment to a tenant. The tenant made timely monthly rental payments of $550 per month for the months of January through December 2015. The following expenses were incurred on the entire building: In addition, depreciation allocable to the rented apartment is $1,500. What amount should Bill report as net rental income for 2015?

A)$0
B)$100
C)$1,400
D)$2,600
E)None of the above

Question 10

Donald rents out his vacation home for 9 months and lives in his vacation home for the remainder of the year. His gross rental income for 2015 is $7,200. The expenses attributable to the vacation home for the entire year are as follows:
What amount would Donald report as net income or loss from the rental of the vacation home?

Question 11

Mike owns a house that he rents out for $1,000 per month. His expenses for the 2015 tax year are as follows:
Mike bought the property in September of 1997, and his basis for depreciation on the house is $137,500. He uses straight-line depreciation with a 27 ½-year life, so the depreciation on the house is $5,000. Mike does not use a property manager and handles all aspects of the rental activity himself.
a.​
Calculate Mike's net income or loss from renting the house if his gross rental income is $12,000 ($1,000 × 12 months).
b.Is the income or loss on Mike's rental considered to be active, passive, or portfolio income?

Question 12

The expenses associated with the rental of a residence used for both personal and rental purposes are subject to three possible tax treatments. Which of the following is not included as one of the three?

A)If a residence is rented for fewer than 15 days during the year the rental period is disregarded and the residence is regarded as a personal residence for tax purposes.
B)If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as rental property.
C)If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as a personal residence for tax purposes.
D)If the residence is rented for 15 days or more and is used for personal purposes for more than 14 days or 10 percent of the days rented, whichever is greater, allocable rental expenses are allowed only to the extent of rental income.

Question 13

In most cases, an individual taxpayer reports rental income and the related expenses on Schedule E.

Question 14

Under the passive loss rules, real estate rental activities are specifically defined as passive, even if the taxpayer actively manages the property.

Question 15

Patrick owns a home on the beach in Daytona. He lives in the house for most of the year but leaves town during the popular motor sports race that comes through every year. During that time, he rents his home out for 3 weeks to race fans for $5,000. Which of the following is true?

A)Because Patrick rents the house for such a short period of time, the rental income is not taxable but he may deduct a percentage of expenses such as utilities and depreciation on the home.
B)Patrick did not rent the house for a long enough period of time to deduct a percentage of expenses such as utilities and depreciation on the home.The rental income he receives is taxable.
C)Because Patrick rented the home for more than 14 days, he must report the income.He is also allowed to deduct a percentage of expenses such as utilities and depreciation to the extent of the income.
D)If you live in your house for more than 50 percent of the year, then it is treated as a personal residence and you cannot deduct any expenses such as utilities and depreciation on the home.
E)None of the above is true.

Question 16

Lester rents his vacation home for 6 months and lives in the home during the other 6 months of 2015. The gross rental income from the home is $4,500. For the entire year, real estate taxes are $800, interest is $3,000, utilities and maintenance expenses are $2,200, and depreciation expense on the entire home would be $4,000. What is Lester's allowable net loss from renting his vacation home?

A)$5,500 loss
B)$3,000 loss
C)$500 loss
D)$250 loss
E)None of the above

Question 17

Selma owns a beach cottage that she rents to tourists. In 2015 she rented the cottage for 90 days.​ What is the maximum number of days Selma can use the cottage before her expense deduction will be limited to her gross rental income?

A)​0 days
B)​9 days
C)​14 days
D)​18 days

Question 18

Mort is the owner of an apartment building containing ten identical apartments. Mort resides in one apartment and rents out the remaining units. For 2015, the following information is available: What amount should Mort report as net rental income for 2015?

A)$12,750
B)$13,500
C)$13,750
D)$14,400
E)None of the above

Question 19

Net losses on the rental of vacation homes are limited to 15 percent of total gross income.

Question 20

Without regard to their involvement in the management of the rental property, individual taxpayers may deduct up to $25,000 of rental real estate losses against other income, provided their income does not exceed certain limits.

Question 21

Thelma works at a liquor store in 2015 and makes $44,000. She also has dividend income of $12,000 and interest income of $1,000. She owns a beach house that gives her $11,000 in net rental income and she owns a stake in a limited partnership that generates a $15,000 loss. What is her adjusted gross income in 2015?

A)$58,000
B)$45,000
C)$69,000
D)$57,000
E)$53,000

Question 22

For the current year, Robert, a single taxpayer, earned wages of $235,000 from Big Shot Corporation. He also received interest income of $1,000 from Little Credit Union. Robert had a $9,000 loss from his rental property which he actively manages. $2,000 of income was also reported on his Schedule K-1 from ABC Limited Partnership. Neither the rental property nor the partnership investment has passive losses carried over from prior years. Since Robert is not an active participant in a retirement plan, he decides to contribute $5,500 to his IRA.
a.Calculate Robert's adjusted gross income using the above information.
b.How much is Robert's unallowed loss from his passive investments?
c.What happens to the unallowed passive loss?
d.Calculate Robert's adjusted gross income assuming his wages were only $35,000.

Question 23

For purposes of the passive loss rules, income is classified into three separate categories. What are the three categories of individual income? Give an example of each.
(1)
(2)
(3)

Question 24

Arnold purchased two rental properties 6 years ago. He actively participates in their management. During 2015, Arnold had income of $22,000 from one of the rentals. He had a loss from the other rental of $32,000, as well as salary income of $35,000, and dividend income of $2,000. What is Arnold's net passive income or loss deduction?

A)$8,000 net loss
B)$10,000 net loss
C)$22,000 net loss
D)$32,000 net loss
E)None of the above

Question 25

Carey, a single taxpayer, purchased a rental house in 2015, which he actively manages. During 2015, Carey had a loss of $14,000 from the rental house. If Carey's adjusted gross income for 2015 is $138,000 before the rental loss, what is the amount of Carey's allowable deduction for the rental activity for 2015?

A)$0
B)$3,000
C)$6,000
D)$12,000
E)None of the above

Question 26

Ned has active modified adjusted gross income before passive losses of $160,000. He has a loss of $15,000 on rental property he actively manages. How much of the loss is he allowed to deduct against his other income?

A)None
B)$10,000
C)$15,000
D)$5,000

Question 27

Christian, a single taxpayer, acquired a rental house in 2002. The rental house, which Christian actively manages, generated a $15,000 loss in 2015. In addition, Christian owns a limited partnership interest which he acquired in 2007. His share of the partnership loss for 2015 is $10,000. Christian has modified adjusted gross income, before the rental loss and partnership loss, of $134,000.
​
What is the amount of these losses that Christian may deduct in 2015?

Question 28

Norm is a real estate professional with a real estate trade or business as defined in the tax law. He has $150,000 of business income and $50,000 of losses from actively managed real estate rentals. How much of the $50,000 in losses is he allowed to claim on his tax return?

A)$25,000
B)None
C)$50,000
D)$20,000

Question 29

Moe has a law practice and earns $322,000 which he reports on his Schedule C. His wife, Mindy, works part-time at Wal-Mart and earns $8,300. Mindy does not receive any medical benefits through Wal-Mart. Their 29-year-old daughter, Michelle, who is not a dependent, is working towards earning her Master's degree.
Moe and Mindy pay the following amounts:
How much may Moe and Mindy claim on their tax return as a self-employed health insurance deduction?

Question 30

Wages are considered "active income."

Question 31

Arnold purchased interests in two limited partnerships 6 years ago. During 2015, Arnold had income of $22,000 from one of the partnerships. He had a loss from the other partnership of $32,000, salary income of $35,000, and dividend income of $2,000. What is the amount of net passive losses that Arnold may deduct for 2015?

A)$0
B)$2,000
C)$8,000
D)$10,000
E)None of the above

Question 32

Nancy has active modified adjusted gross income before passive losses of $125,000. She has a loss of $15,000 on a rental property she actively manages. How much of the loss is she allowed to deduct against the $125,000 of other income?

A)None
B)$2,500
C)$5,000
D)$12,500

Question 33

Dividend income is considered "passive income."

Question 34

Choose the correct statement. Passive losses

A)May not be used to offset passive income.
B)May be used to offset portfolio income.
C)Often result from the rental of real estate.
D)If unused, are lost forever.

Question 35

Warren invested in a limited partnership tax shelter in 2002. During 2015, his losses from the partnership amount to $100,000. If Warren has no passive income, what is the amount of Warren's deduction for passive losses for 2015?

A)$0
B)$10,000
C)$20,000
D)$40,000
E)None of the above

Question 36

What percentage of medical insurance payments can self-employed taxpayers deduct for adjusted gross income on their 2015 tax returns, assuming their self-employment income exceeds their medical insurance payments? ​

A)60 percent
B)70 percent
C)50 percent
D)90 percent
E)100 percent

Question 37

Which of the following is true about the self-employed health insurance deduction?

A)Dental insurance is not part of the allowable deduction.
B)Medical insurance is allowed as a deduction, subject to a dollar limitation.
C)Life insurance is allowed as a deduction.
D)Long-term care insurance is allowed as a deduction, subject to a dollar limitation.
E)The cost of insurance for dependent children is not allowed.

Question 38

​Which of the following can be used to offset a passive loss?

A)Active income such as wages
B)​Passive income such as income from a limited partnership
C)​Dividend income from stock held as an investment
D)​Pension income
E)All but a.

Question 39

Ellen supports her family as a self-employed attorney. She reports $90,000 of income on her Schedule C and pays $8,000 for health insurance for her family, $2,500 for dental insurance, $4,000 for health insurance for her 23-year-old daughter who is no longer a dependent, and $3,000 for disability insurance for herself. What is Ellen's self-employed health insurance deduction?

A)$8,000
B)$10,500
C)$12,000
D)$14,500
E)$13,500

Question 40

Mike and Rose are married and file jointly. Mike earns $45,000 from wages and Rose reports $450 on her Schedule C as an artist. Since Mike's work does not offer health insurance, Rose pays the following health insurance premiums from her business account:
How much can Mike and Rose deduct as self-employed health insurance?

Question 41

Miki, who is single and 57 years old, has a quaifying high-deductible insurance plan. She had the following transactions with her HSA during the year:
a.How much may Miki claim as a deduction for adjusted gross income?
b.What is the amount that Miki must report on her tax return as income from her HSA?
c.How much is subject to a penalty? What is the penalty percentage?

Question 42

Subject to the annual dollar limitation and the earned income limitation, deductible IRA contributions are allowed for all taxpayers who do not participate in a qualified retirement plan.

Question 43

Which of the following statements is false about health savings acounts (HSAs)?

A)HSAs must be paired with qualifying high-deductible health insurance.
B)Taxpayers qualifying for Medicare do not qualify to make HSA contributions.
C)Distributions from HSAs which are not used for medical expenses are generally subject to a 20 percent penalty and income taxes.
D)Distributions from HSAs which are used for qualifying medical expenses are not subject to tax or penalty.
E)Contributions to HSAs are deductible as itemized medical deductions.

Question 44

Unreimbursed qualifying moving expenses are an itemized deduction for 2015.

Question 45

Monica has a Roth IRA to which she contributed $15,000. The IRA has a current value of $37,500. She is 54 years old and takes a distribution of $25,000. How much of the distribution will be taxable to Monica?

A)$0
B)$10,000
C)$15,000
D)$25,000
E)$37,500

Question 46

In some cases, a taxpayer may deduct an otherwise allowable contribution to an IRA, even though the contribution is made after the close of the tax year.

Question 47

To qualify for the moving expense deduction, an employee must change job sites, move a required distance, and change employers.

Question 48

Gary and Charlotte incurred the following expenses in connection with Gary's job transfer from Florida to South Carolina:
How much is their qualified moving expense?

Question 49

A 42-year-old single taxpayer earning a salary of $132,000 a year can make which of the following IRA contributions if he is not covered by a plan at work?

A)$5,500 to either a traditional IRA, a Roth IRA, or a nondeductible IRA
B)$4,500 to either a traditional IRA, a Roth IRA, or a nondeductible IRA
C)$5,500 to a Roth IRA only
D)$5,500 to either a traditional IRA or a nondeductible IRA, but no contribution is allowed to a Roth IRA

Question 50

Which of the following is not a test which must be met to qualify for the moving expense deduction?

A)The taxpayer must stay with the same employer.
B)The taxpayer must change job sites.
C)The taxpayer must remain at the new job location for 39 weeks during the 12 months following the move (78 weeks out of 24 months if self-employed).
D)The distance from the taxpayer's former residence to the new job must be at least 50 miles more than the former residence to the former job.
E)All of the above are tests for the moving expense deduction.

Question 51

Earnings on nondeductible IRA contributions are allowed to accumulate tax-free until they are withdrawn.

Question 52

XYZ Corporation has assigned Allison to inspect their zipper manufacturing plant in China for the next 4 months. Allison has incurred the following expenses:
How much may Allison deduct as moving expenses?

Question 53

Since a contribution to an IRA is a voluntary action, a taxpayer may withdraw amounts from an IRA at any time without penalty.

Question 54

What is the amount of the deductible HSA for each of the following taxpayers?
a.Amelia and Albert, both age 43, have a qualifying high-deductible insurance plan.They contribute $5,700 to a family HSA.
b.Betsy, who is single, 72 years old and covered by Medicare, wants to contribute the maximum amount to an HSA.
c.Carlo has health insurance through his employer which has low deductible amounts.He is 34 years old and is married.Carlo wants to contribute the maximum to an HSA.
d.Diane is 57 years old.She has a qualifying high-deductible insurance plan.She has contributed $4,350 to her HSA.

Question 55

In 2015, all taxpayers may make a deductible or nondeductible contribution to an IRA.

Question 56

If a taxpayer receives an early distribution from an IRA due to disability, he or she will not be subject to a penalty.

Question 57

Which of the following is not deductible as a moving expense?

A)The cost of moving household goods
B)Lodging for household members during the move
C)The cost of a pre-move house-hunting trip
D)Travel expenses during the move
E)All of the above are deductible as moving expenses

Question 58

Which of the following statements is true about health savings accounts (HSAs)?

A)There is no restriction on the kind of health insurance taxpayers must carry in order to qualify for an HSA.
B)Contributions to HSAs are not deductible for adjusted gross income (AGI), but are treated as an itemized deduction.
C)Individuals taking distributions from HSAs which are not for medical expenses are subject to a 50 percent penalty.
D)Distributions from HSAs are tax and penalty free when used for qualified medical expenses.
E)Taxpayers may take tax and penalty free distributions from HSAs to purchase automobiles after age 65.

Question 59

If under 50 years of age, a taxpayer may make a contribution to an IRA, subject to the earned income limitation and the $5,500 annual limitation.

Question 60

A taxpayer must make contributions to a regular or Roth IRA prior to the end of the year in order to claim the deduction for that year.

Question 61

Wilson and Joan, both in their 30s, file a joint income tax return for 2015. Wilson's wages are $15,000 and Joan's wages are $23,000 for the year. Their total adjusted gross income is $38,000, and Joan is covered by a qualified pension plan at work but Wilson is not.
a.​
What is the maximum amount that Wilson and Joan may each deduct for contributions to their individual retirement accounts?
b.​
​
If Joan's wages are $88,000 for 2015, instead of $23,000, and their adjusted gross income is $103,000, what is the maximum amount that Wilson and Joan may each deduct for contributions to their individual retirement accounts?

Question 62

What is the maximum amount a 55-year-old taxpayer and a 48-year-old spouse can put into a Traditional or Roth IRA for 2015, assuming they earn $85,000 in total and are not participants in pension plans?

Question 63

What is the difference between the tax treatment of contributions and distributions from a traditional IRA and a Roth IRA?

Question 64

Rob and Julie, both in their 30s, file a joint income tax return for 2015. Rob's wages are $25,000 and Julie's wages are $33,000 for the year. Their total adjusted gross income is $58,000, and Julie is covered by a qualified pension plan at work but Rob is not.
a.What is the maximum amount that Rob and Julie may each contribute to their Roth IRAs?
b.​
​
​
If Julie's wages are $110,000 for 2015, instead of $33,000, and their adjusted gross income is $135,000, (1) what is the maximum amount that Rob and Julie may each deduct for contributions to their individual retirement accounts, and (2) what is the maximum amount they could each contribute to Roth IRAs instead?

Question 65

Choose the incorrect answer. Money removed from a traditional IRA is taxable as ordinary income and subject to a 10 percent penalty except for taxpayers who are:

A)Paying the costs of higher education, including tuition, fees, books, and room and board for a dependent child
B)Withdrawing up to $10,000 of first-time home-buying expenses
C)Using the withdrawals for medical expenses in excess of 10 percent of their AGI, for persons younger than 65 years old
D)Over 59 1/2 years old

Question 66

Jim lives in California. What is Jim's deadline for making a contribution to traditional IRA or a Roth IRA for 2015?

A)April 15, 2015
B)December 31, 2015
C)April 18, 2016
D)October 15, 2016

Question 67

Under the SEP plan provisions, deductible contributions to a qualified retirement plan on behalf of an employee whose net earned income is $20,000 are limited to:

A)$1,500
B)$2,000
C)$4,000
D)$5,000
E)None of the above

Question 68

Steven is 27 years old and has a total AGI of $110,000 in 2015. He contracts pneumonia in 2015 and incurs a medical bill that totals $7,500. He withdraws $7,500 from his traditional IRA to pay the bill. Which of the following is true?

A)He is not subject to penalties on the IRA withdrawal because it was for medical expenses.
B)He is not subject to penalties on the IRA withdrawal because he was disabled by pneumonia for 2 weeks.
C)He is subject to penalties on the IRA withdrawal because a person may not take a withdrawal from a traditional IRA until they are 59 ½ years old no matter what.
D)He is subject to penalties on the IRA withdrawal because the withdrawal did not cover a portion of medical bills that exceeded 10 percent of his AGI.
E)None of the above is correct.

Question 69

What is the maximum amount a 30-year-old taxpayer and a 35-year-old spouse can put into a Traditional or Roth IRA for 2015, assuming they earn $50,000 in total and are not covered by pension plans?

Question 70

Barrett is a 45-year-old political commentator who has self-employed net earned income of $170,000 in 2015. What is the maximum amount he can deduct for contributions to his simplified employee pension (SEP) for the year?

Question 71

Donald, a 40-year-old married taxpayer, has a salary of $55,000 and interest income of $6,000. He is an active participant in his employer's pension plan. What is the maximum amount Donald can contribute to a Roth IRA?

A)$550
B)$610
C)$1,220
D)$3,000
E)$5,500

Question 72

Christine is a self-employed graphics artist who has net earned income of $160,000 from her business. Christine has a defined contribution SEP Plan and plans to contribute the amount that provides the maximum deduction allowable. How much can Christine contribute?

Question 73

Which of the following statements is correct?

A)Contributions to SEP plans by self-employed taxpayers are generally limited to the lesser of 15 percent of their net earned income (before the SEP deduction) or $45,000.
B)The contribution limits for SEPs are the lesser of 25 percent of net self-employment income or $53,000 for a self-employed taxpayer.
C)Employees may elect to make annual contributions to 401(k) plans up to the lesser of 15 percent of their net earned income (before the 401(k) deduction) or $45,000.
D)The contribution limits for SEPs are a maximum of $17,500 ($23,000 for taxpayers 50 or older).

Question 74

John is a single 40-year-old landscape architect earning $125,000 a year and is not covered by a pension plan at work. How much can he put into a Traditional IRA in 2015?

Question 75

Contributions by a self-employed individual to a SEP plan for 2015 are limited to the lesser of a percent of net earned income or:

A)$50,000
B)$51,000
C)$52,000
D)$53,000
E)None of the above

Question 76

Ben is a 19-year-old single software inventor earning $200,000 a year and is not covered by a pension plan at work. How much can he put into a Roth IRA in 2015?

Question 77

Which of the following taxpayers qualifies for the maximum individual retirement account deduction for 2015?

A)Married taxpayers, neither of whom is covered by a qualified retirement plan, with total adjusted gross income, all earned, of $85,000
B)A single taxpayer, who is covered by a qualified retirement plan, with adjusted gross income of $80,000
C)A single taxpayer, who is not covered by a qualified retirement plan, with no earned income but with unearned income of $12,000
D)Married taxpayers, only one of whom is covered by a qualified retirement plan, with total adjusted gross income of $190,000
E)None of the above qualify for the maximum deduction

Question 78

Jeremy, age 38, has $25,000 in a traditional IRA account and is considering taking the money out to buy himself a new car. What will be the tax consequences to Jeremy if he withdraws the $25,000 from his IRA in 2015 for this purpose? Explain.

Question 79

Debbie is 63 years old and retired in 2013. She receives Social Security payments of $12,000 a year and interest income of $30,000. She wishes to put the maximum allowed into an IRA. How much can she contribute to her IRA?

Question 80

Jody is a physician (not covered by a retirement plan) with a salary of $40,000 from the hospital where she is employed. She supports her husband, Andre, who sells art work and has no earned income. Both are in their twenties. What is the maximum total amount that Jody and Andre may contribute to their IRAs and deduct for the 2015 tax year?

A)$5,500
B)$5,000
C)$11,000
D)$10,000
E)None of the above