Test Bank For Income Tax Fundamentals 2017 35th Edition by Gerald E. Whittenburg

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Test Bank For Income Tax Fundamentals 2017 35th Edition by Gerald E. Whittenburg

Chapter 4 Business Income and Expenses Part II

1. 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.

  a.  True

  b.  False

ANSWER:   False

RATIONALE:   If a residence is primarily used as a rental, the expenses must still be allocated between personal and rental days.

POINTS:   1

DIFFICULTY:   Challenging

QUESTION TYPE:   True / False

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Knowledge

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

  a.  True

  b.  False

ANSWER:   False

RATIONALE:   Expenses attributable to vacation homes used primarily as personal residences are limited to the income generated from the rental of the property.

POINTS:   1

DIFFICULTY:   Easy

QUESTION TYPE:   True / False

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Knowledge

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

  a.  True

  b.  False

ANSWER:   True

POINTS:   1

DIFFICULTY:   Easy

QUESTION TYPE:   True / False

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Knowledge

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

  a.  True

  b.  False

ANSWER:   True

POINTS:   1

DIFFICULTY:   Easy

QUESTION TYPE:   True / False

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Knowledge

5. Lester rents his vacation home for 6 months and lives in the home during the other 6 months of 2016. 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

ANSWER:   e

RATIONALE:   Lester’s calculated loss is:

​

 Gross income  $4,500

 Real estate taxes (50% x $800)  (400)

 Interest (50% x $3,000) (1,500)

Utilities (50% x $2,200)   (1,100)

Depreciation (50% x $4,000)  (2,000) 

 Net rental loss ($500)

​

Because the home is classified as a vacation home which has both rental and personal use, expenses are only deductible to the extent of rental income.

POINTS:   1

DIFFICULTY:   Challenging

QUESTION TYPE:   Multiple Choice

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Comprehension

6. 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 2016. The following expenses were incurred on the entire building:

Utilities $3,600

Maintenance and repairs 900

Insurance   500

In addition, depreciation allocable to the rented apartment is $1,500. What amount should Bill report as net rental income for 2016?

  a.  $0

  b.  $100

  c.  $1,400

  d.  $2,600

  e.  None of the above

ANSWER:   d

RATIONALE:   [$6,600 (12 × $550) – $1,500 – 50% × ($3,600 + $900 + $500) = $2,600]

POINTS:   1

DIFFICULTY:   Moderate

QUESTION TYPE:   Multiple Choice

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Comprehension

7. Mort is the owner of an apartment building containing ten identical apartments. Mort resides in one apartment and rents out the remaining units. For 2016, the following information is available:

Gross rents $21,600

Utilities for total building  2,500

Maintenance and repairs (rental apartments only)  1,050

Advertising for vacant apartments 300

Depreciation of building (all ten units)  4,000

What amount should Mort report as net rental income for 2016?

  a.  $12,750

  b.  $13,500

  c.  $13,750

  d.  $14,400

  e.  None of the above

ANSWER:   d

RATIONALE:   [$21,600 – $1,050 – $300 – 90% × ($2,500 + $4,000)]

POINTS:   1

DIFFICULTY:   Moderate

QUESTION TYPE:   Multiple Choice

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Comprehension

8. 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, 2016:

Real estate taxes $ 1,800

Mortgage interest  1,600

Utilities  1,200

Repairs (first floor)  1,400

Painting (second floor)  400

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

ANSWER:   d

RATIONALE:   [$1,400 + 50% × ($1,800 + $1,600 + $1,200 + $2,000)]

POINTS:   1

DIFFICULTY:   Moderate

QUESTION TYPE:   Multiple Choice

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Comprehension

9. 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.

ANSWER:   c

POINTS:   1

DIFFICULTY:   Moderate

QUESTION TYPE:   Multiple Choice

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Knowledge

10. 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.

ANSWER:   c

POINTS:   1

DIFFICULTY:   Moderate

QUESTION TYPE:   Multiple Choice

HAS VARIABLES:   False

LEARNING OBJECTIVES:   ITF.WABG.16.LO:4-01 – LO:4-01

NATIONAL STANDARDS:   United States – BUSPROG: Analytic

STATE STANDARDS:   United States – AK – AICPA: FN-Reporting

KEYWORDS:   Bloom’s: Comprehension