FEDERAL TAX ACCOUNTING (EXAM 1) – COMPLETE TEST QUESTIONS
WITH VERIFIED ANSWERS | TAXABLE INCOME, ADJUSTMENTS,
CREDITS & FILING STATUS MASTERY
THE BUSINESS PURPOSE CONCEPT MEANS
I. THAT THE ECONOMIC PURPOSE OF THE TRANSACTION MUST EXCEED THE TAX AVOIDANCE
MOTIVE.
II. THAT THE TAXPAYER'S DOMINANT MOTIVE FOR AN EXPENDITURE IS TO REDUCE TAXATION..
A. ONLY STATEMENT I IS CORRECT.
B. ONLY STATEMENT II IS CORRECT.
C. BOTH STATEMENTS ARE CORRECT.
D. NEITHER STATEMENT IS CORRECT.
ANSWER>> A. ONLY STATEMENT I IS CORRECT.
WHICH OF THE FOLLOWING INDIVIDUALS IS INVOLVED IN A TRADE OR BUSINESS?
I. LIL OWNS A FARM NEAR LAFAYETTE, INDIANA. SHE LEASES THE PROPERTY TO CAL, WHO
OPERATES THE FARM FOR HIMSELF. LIZ RECEIVES 10% OF CAL'S NET INCOME AS PART OF THE
LEASE AGREEMENT BUT HAS NO RESPONSIBILITIES FOR THE FARMING OPERATION.
II. LORRAINE OWNS A WAREHOUSE LOCATED IN BROOKLYN NY. SHE PAID $250,000 FOR THE
REAL ESTATE SEVERAL YEARS AGO. IT IS NOW APPRAISED AT OVER $1,000,000, BUT SHE STILL
USES THE BUILDING ONLY TO STORE HER PAINTING COLLECTION.
A. ONLY STATEMENT I IS CORRECT.
B. ONLY STATEMENT II IS CORRECT.
C. BOTH STATEMENTS ARE CORRECT.
D. NEITHER STATEMENT IS CORRECT.
, ANSWER>> D. NEITHER STATEMENT IS CORRECT.
ALL OF THE FOLLOWING ARE REQUIRED TEST FOR THE DEDUCTION OF A BUSINESS EXPENSE
EXCEPT?
A. GAAP APPROVED.
B. ORDINARY.
C. NECESSARY.
D. BUSINESS PURPOSE.
E. REASONABLE IN AMOUNT.
ANSWER>> A. GAAP APPROVED.
WHICH OF THE FOLLOWING IS NOT DEDUCTIBLE?
A. EXPENSES RELATED TO EARNING DIVIDENDS ON A PORTFOLIO OF "BLUE CHIP" STOCKS.
B. EXPENSES RELATED TO INTEREST INCOME FROM MUNICIPAL BONDS.
C. LEGAL EXPENSES RELATED TO RENTAL REAL ESTATE PROPERTY.
D. MEDICAL EXPENSES OF THE TAXPAYER'S DEPENDENT CHILD.
ANSWER>> B. EXPENSES RELATED TO INTEREST INCOME FROM MUNICIPAL BONDS.
JACKIE RECENTLY RETIRED FROM THE U.S. COAST GUARD AFTER 30 YEARS OF SERVICE. SHE
WOULD LIKE TO OPEN A BOAT SHOP TO OPERATE IN HER RETIREMENT YEARS. JACKIE INCURS
$3,800 OF EXPENSES WHILE INVESTIGATING SITES FOR HER SHOP AND WHILE CHECKING OUT
BOAT FRANCHISES. WHAT ARE THE TAX EFFECTS OF THE EXPENSES JACKIE INCURS?
I. IF JACKIE ENTERS THE BOAT BUSINESS, SHE CAN DEDUCT THE COSTS ONLY BY CAPITALIZING
THEM AND AMORTIZING THEM OVER 180 MONTHS.
WITH VERIFIED ANSWERS | TAXABLE INCOME, ADJUSTMENTS,
CREDITS & FILING STATUS MASTERY
THE BUSINESS PURPOSE CONCEPT MEANS
I. THAT THE ECONOMIC PURPOSE OF THE TRANSACTION MUST EXCEED THE TAX AVOIDANCE
MOTIVE.
II. THAT THE TAXPAYER'S DOMINANT MOTIVE FOR AN EXPENDITURE IS TO REDUCE TAXATION..
A. ONLY STATEMENT I IS CORRECT.
B. ONLY STATEMENT II IS CORRECT.
C. BOTH STATEMENTS ARE CORRECT.
D. NEITHER STATEMENT IS CORRECT.
ANSWER>> A. ONLY STATEMENT I IS CORRECT.
WHICH OF THE FOLLOWING INDIVIDUALS IS INVOLVED IN A TRADE OR BUSINESS?
I. LIL OWNS A FARM NEAR LAFAYETTE, INDIANA. SHE LEASES THE PROPERTY TO CAL, WHO
OPERATES THE FARM FOR HIMSELF. LIZ RECEIVES 10% OF CAL'S NET INCOME AS PART OF THE
LEASE AGREEMENT BUT HAS NO RESPONSIBILITIES FOR THE FARMING OPERATION.
II. LORRAINE OWNS A WAREHOUSE LOCATED IN BROOKLYN NY. SHE PAID $250,000 FOR THE
REAL ESTATE SEVERAL YEARS AGO. IT IS NOW APPRAISED AT OVER $1,000,000, BUT SHE STILL
USES THE BUILDING ONLY TO STORE HER PAINTING COLLECTION.
A. ONLY STATEMENT I IS CORRECT.
B. ONLY STATEMENT II IS CORRECT.
C. BOTH STATEMENTS ARE CORRECT.
D. NEITHER STATEMENT IS CORRECT.
, ANSWER>> D. NEITHER STATEMENT IS CORRECT.
ALL OF THE FOLLOWING ARE REQUIRED TEST FOR THE DEDUCTION OF A BUSINESS EXPENSE
EXCEPT?
A. GAAP APPROVED.
B. ORDINARY.
C. NECESSARY.
D. BUSINESS PURPOSE.
E. REASONABLE IN AMOUNT.
ANSWER>> A. GAAP APPROVED.
WHICH OF THE FOLLOWING IS NOT DEDUCTIBLE?
A. EXPENSES RELATED TO EARNING DIVIDENDS ON A PORTFOLIO OF "BLUE CHIP" STOCKS.
B. EXPENSES RELATED TO INTEREST INCOME FROM MUNICIPAL BONDS.
C. LEGAL EXPENSES RELATED TO RENTAL REAL ESTATE PROPERTY.
D. MEDICAL EXPENSES OF THE TAXPAYER'S DEPENDENT CHILD.
ANSWER>> B. EXPENSES RELATED TO INTEREST INCOME FROM MUNICIPAL BONDS.
JACKIE RECENTLY RETIRED FROM THE U.S. COAST GUARD AFTER 30 YEARS OF SERVICE. SHE
WOULD LIKE TO OPEN A BOAT SHOP TO OPERATE IN HER RETIREMENT YEARS. JACKIE INCURS
$3,800 OF EXPENSES WHILE INVESTIGATING SITES FOR HER SHOP AND WHILE CHECKING OUT
BOAT FRANCHISES. WHAT ARE THE TAX EFFECTS OF THE EXPENSES JACKIE INCURS?
I. IF JACKIE ENTERS THE BOAT BUSINESS, SHE CAN DEDUCT THE COSTS ONLY BY CAPITALIZING
THEM AND AMORTIZING THEM OVER 180 MONTHS.
