Which of the following are deductions for AGI?
a. Fines and penalties incurred in a trade or business.
b. Property taxes on a personal residence.
c. Mortgage interest on a personal residence.
d. Mortgage interest on a building used in a business.
Which of the following is incorrect?
a. Property taxes on taxpayer’s personal residence are a deduction from AGI.
b. The expenses associated with rental property are a deduction from AGI.
c. The expenses associated with a proprietorship are a deduction for AGI.
d. Contributions to a traditional IRA are a deduction for AGI.
Paula is the sole shareholder of Violet, Inc. For 2022, she receives from Violet a salary of $450,000 and dividends of
$100,000. Violet’s taxable income for 2022 is $500,000. On audit, the IRS treats $100,000 of Paula’s salary as
unreasonable. Which of the following statements is correct?
a. Violet’s taxable income will increase by $100,000 as a result of the IRS adjustment.
b. Paula’s gross income will decrease by $100,000 as a result of the IRS adjustment.
c. Paula’s gross income will increase by $100,000 as a result of the IRS adjustment.
d. Violet’s taxable income will not be affected by the IRS adjustment.
Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a
business selling narcotics. Both businesses have gross revenues of $500,000. The businesses incur the following
expenses.
Terry Jim
Employee salaries $200,000 $200,000
Bribes to police 25,000 25,000
Rent and utilities 50,000 50,000
Cost of goods sold –0– 125,000
Which of the following statements is correct?
a. Terry should report profit from his business of $250,000.
b. Jim should report profit from his business of $250,000.
c. Jim should report profit from his business of $500,000.
d. Neither Terry nor Jim can deduct any of these items in calculating the business profit.
Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000.
During 2022 she sold the bedspreads for $10,000. She incurred expenses as follows:
Fabric and other supplies needed to make bedspreads $4,000
Interest on loan to get business started 500
Advertising 6,500
Assuming that the activity is deemed a hobby, how should she report these items on her tax return?
a. Include $10,000 in income and deduct $4,000 for AGI as cost of goods sold.
b. Ignore both income and expenses since hobby losses are disallowed.
c. Include $10,000 in income and deduct nothing.
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6. MC.07-057
7. MC.07-059
8. MC.07-062
9. MC.07-065
10. MC.07-067
d. Include $10,000 in income and deduct $11,000 for AGI.
Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $97,000
on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No
subsequent collections are expected.
a. $13,000 loss
b. $7,000 gain
c. $2,000 gain
d. $3,000 loss
Five years ago, Tom loaned his son Liam $20,000 to start a business. A note was executed with an interest rate of
8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of
10 years. Liam always made the interest payments until last year. During the current year, Liam notified his father that
he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual
basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note
is:
a. $3,000 deduction.
b. No deduction.
c. $21,800 deduction.
d. $20,000 deduction.
On February 20, 2021, Alicia purchased stock in Pink Corporation (the stock is not small business stock) for $1,000.
On May 1, 2022, the stock became worthless. During 2022, Alicia also had an $8,000 loss on § 1244 small business
stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How
should Alicia treat these items on her 2022 tax return?
a. $8,000 ordinary loss and $5,000 short-term capital loss.
b. $8,000 ordinary loss and $3,000 short-term capital loss.
c. $4,000 long-term capital loss and $3,000 short-term capital loss.
d. $4,000 long-term capital loss and $9,000 short-term capital loss.
On July 20, 2019, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is §
1244 small business stock) for $24,000 from a friend. On November 10, 2021, Matt purchased an additional 1,000
shares of Orange Corporation stock from another friend for $150,000. On September 15, 2022, Matt sold the 4,000
shares of stock for $120,000. How should Matt treat the sale of the stock on his 2022 return?
a. $100,000 ordinary loss; $46,000 net capital gain.
b. $100,000 ordinary loss; $20,000 STCL.
c. $130,000 ordinary loss; $66,000 LTCG.
d. $54,000 STCL.
In 2022, Wally had the following insured personal casualty losses (arising from one casualty in a Federally declared
disaster area). Wally also had $42,000 AGI for the year before considering the casualty.
Fair Market Value
Asset Adjusted Basis Before After Insurance Recovery
A $9,200 $8,000 $1,000 $2,000
B 3,000 4,000 -0- 4,000
C 3,700 1,700 -0- 900
Wally’s casualty loss deduction is:
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11. MC.08-055
12. MC.08-060
13. MC.08-061
14. MC.08-065
15. MC.08-066
a. $4,800.
b. $4,700.
c. $500.
d. $1,600.
Bonnie purchased a new business asset (five-year property) on March 10, 2022, at a cost of $30,000. She also
purchased a new business asset (seven-year property) on November 20, 2022, at a cost of $13,000. Bonnie did not
elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional
first-year depreciation. Determine the cost recovery deduction for 2022 for these assets.
a. $9,586
b. $21,915
c. $7,858
d. $43,000
White Company acquires a new machine (seven-year property) on January 10, 2022, at a cost of $620,000. White
makes the election to expense the maximum amount under § 179, and wants to take any additional first-year
depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in
calculating taxable income related to the machine for 2022, assuming that White reports taxable income of $800,000.
a. $568,574
b. $301,159
c. $88,598
d. $620,000
In 2021, Mei had a § 179 deduction carryover of $30,000. In 2022, she elected § 179 for an asset acquired at a cost
of $115,000. Mei’s § 179 business income limitation for 2022 is $140,000. Determine Mei’s § 179 deduction for 2022.
a. $115,000
b. $130,000
c. $25,000
d. $140,000
On June 1, 2021, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and
30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-
year depreciation. Determine the cost recovery deduction for 2022.
a. $10,200
b. $3,290
c. $3,570
d. $4,704
On June 1, 2022, Nico places in service a new automobile that cost $40,000. The car is used 60% for business and
40% for personal use. (Assume this percentage is maintained for the life of the car.) Nico does not take additional
first-year depreciation. Determine the cost recovery deduction for 2022.
a. $1,896
b. $4,800
c. $1,776
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16. MC.09-076
d. $6,120
During 2023, John (a self-employed management consultant) went from Milwaukee to Hawaii on business. Preceding a
five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for
the trip are:
Airfare $3,200
Lodging 900
Meals 800
Entertainment 600
Presuming no reimbursement, deductible expenses are:
a. $5,500.
b. $3,200.
c. $4,500.
d. $3,900.
