Int. ACCT 1 - UARK – Rowe
Midterm Exam 2025 Questions
with100% Correct Answers
(Graded A+)
Three categories of deductions for AGI - 1. Directly related to business activities. Activities must
either be profit motivated or personal.
2. Indirectly related to business activities.
3. Deductions subsidizing specific activities.
Profit motivated activities - 1. business activities (high involvement)
2. Investment activities (appreciation for income payments)
Trade/Business Activities - must be: directly connected, ordinary and necessary, reasonable in
amount (not extravagant)
Schedule C - like a mini income statement used to measure/report self employment business income
(income that you actually go out and "do" something to earn it). Subject to self employment tax
which is basically the employer's side of social security and Medicare. The net income or loss does to
schedule 1.
Schedule E - used to report passive income. This income is either rental income you receive because
you own rental property or a royalty payment you receive. Not subject to to additional self
employment tax (like on schedule C) so that is why it is reported differently. Essentially, this is income
that you receive but don't actually work for. Net income or loss goes to schedule 1.
Flow through entities gain/loss goes on schedule E and then to schedule 1.
,Schedule F - used by self employed farmers to report their income and expenses from their farming
businesses. The IRS says, You are in the business of farming if you cultivate, operate, or manage a
farm for profit either as an owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit, and
truck farms. It also includes plantations, ranches, ranges, and orchards." Schedule F is only used by
farmers who are considered to be sole proprietors. Also reports federal disaster payments and
money received from agricultural programs. Net farm income goes to 1040 schedule 1.
Excess business loss limitation - Schedule E
excess business loss: lesser of business deductions over business gross income
OR
$250,000 ($500,000 MFJ)
excess business loss is carries forward as net operating loss.
Form 4797 - records the sale of business property (assets used in business such as a warehouse). If
assets are held for longer than 1 year and are sold at a gain or loss, they get capital treatment on this
form. They are then combined with investment capital gains and losses on Schedule D. If assets are
held for shorter than 1 year, they are treated as ordinary gains/losses.
Schedule D - Tax form 1040 Schedule D is used to report capital gains for the purpose of income tax.
A capital gain is any profit made from the sale of an investment for more than the purchase price.
Because assets used in business activities (such as a warehouse) are not purchased for the sake of
investment, their gain or loss in first calculated on Form 4797, then added to schedule D.
Limit for net capital loss - net capital loss is deducted for AGI but limited to $3,000 each year
Shown on schedule D then goes to 1040
Losses in excess of the $3,000 limit are carried forward indefinitely.
, Ordinary gain or loss - if asset is held for <1, the gain or loss is ordinary. This is recorded in form 4797,
then moved to Schedule 1 1040.
What is deductible for AGI? - educator expenses, certain business expenses, health savings account,
moving expenses for members of armed forces, deductible part of self employment tax, self
employed SEP, self employed health insurance, penalty on early withdrawal of savings, alimony paid,
IRA deduction, student loan interest deduction
Self employed health insurance deduction - not on schedule C: deduct FOR AGI
To qualify for the deduction, you must meet two requirements:
1. You Have No Other Health Insurance Coverage: You may not take the self-employed health
insurance deduction if you are eligible to participate in a health insurance plan maintained by your
employer or your spouse's employer.
2. You Have Business Income: You may deduct only as much as you earn from your business. If your
business earns no money or incurs a loss, you get no deduction. If you have more than one business,
you cannot combine the income from all your businesses for purposes of the income limit. You may
only use the income from a single business you designate to be the health insurance plan sponsor.
(limited to self employment income BUT excess premiums can be itemized deductions on Schedule
A.)
NOT a business deduction.. its a personal deduction.
Self employment tax - deductible for AGI
self employed people have to pay both halves of the SS and Medicare tax. This tax is not deducted on
Schedule C for the owner, but 1/2 of these taxes are deductible on Schedule 1 of 1040. Reduces
income dollar for dollar.
Penalty for early withdrawals of savings - If you withdraw money from a certificate of deposit (CD) or
other time-deposit savings account before your certificate matures, you'll probably have to pay a
penalty. It's charged by the bank or financial institution, and it's withheld directly from your proceeds
from the certificate of deposit.
The penalty is deductible because it affects the amount of interest you earn.
Midterm Exam 2025 Questions
with100% Correct Answers
(Graded A+)
Three categories of deductions for AGI - 1. Directly related to business activities. Activities must
either be profit motivated or personal.
2. Indirectly related to business activities.
3. Deductions subsidizing specific activities.
Profit motivated activities - 1. business activities (high involvement)
2. Investment activities (appreciation for income payments)
Trade/Business Activities - must be: directly connected, ordinary and necessary, reasonable in
amount (not extravagant)
Schedule C - like a mini income statement used to measure/report self employment business income
(income that you actually go out and "do" something to earn it). Subject to self employment tax
which is basically the employer's side of social security and Medicare. The net income or loss does to
schedule 1.
Schedule E - used to report passive income. This income is either rental income you receive because
you own rental property or a royalty payment you receive. Not subject to to additional self
employment tax (like on schedule C) so that is why it is reported differently. Essentially, this is income
that you receive but don't actually work for. Net income or loss goes to schedule 1.
Flow through entities gain/loss goes on schedule E and then to schedule 1.
,Schedule F - used by self employed farmers to report their income and expenses from their farming
businesses. The IRS says, You are in the business of farming if you cultivate, operate, or manage a
farm for profit either as an owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit, and
truck farms. It also includes plantations, ranches, ranges, and orchards." Schedule F is only used by
farmers who are considered to be sole proprietors. Also reports federal disaster payments and
money received from agricultural programs. Net farm income goes to 1040 schedule 1.
Excess business loss limitation - Schedule E
excess business loss: lesser of business deductions over business gross income
OR
$250,000 ($500,000 MFJ)
excess business loss is carries forward as net operating loss.
Form 4797 - records the sale of business property (assets used in business such as a warehouse). If
assets are held for longer than 1 year and are sold at a gain or loss, they get capital treatment on this
form. They are then combined with investment capital gains and losses on Schedule D. If assets are
held for shorter than 1 year, they are treated as ordinary gains/losses.
Schedule D - Tax form 1040 Schedule D is used to report capital gains for the purpose of income tax.
A capital gain is any profit made from the sale of an investment for more than the purchase price.
Because assets used in business activities (such as a warehouse) are not purchased for the sake of
investment, their gain or loss in first calculated on Form 4797, then added to schedule D.
Limit for net capital loss - net capital loss is deducted for AGI but limited to $3,000 each year
Shown on schedule D then goes to 1040
Losses in excess of the $3,000 limit are carried forward indefinitely.
, Ordinary gain or loss - if asset is held for <1, the gain or loss is ordinary. This is recorded in form 4797,
then moved to Schedule 1 1040.
What is deductible for AGI? - educator expenses, certain business expenses, health savings account,
moving expenses for members of armed forces, deductible part of self employment tax, self
employed SEP, self employed health insurance, penalty on early withdrawal of savings, alimony paid,
IRA deduction, student loan interest deduction
Self employed health insurance deduction - not on schedule C: deduct FOR AGI
To qualify for the deduction, you must meet two requirements:
1. You Have No Other Health Insurance Coverage: You may not take the self-employed health
insurance deduction if you are eligible to participate in a health insurance plan maintained by your
employer or your spouse's employer.
2. You Have Business Income: You may deduct only as much as you earn from your business. If your
business earns no money or incurs a loss, you get no deduction. If you have more than one business,
you cannot combine the income from all your businesses for purposes of the income limit. You may
only use the income from a single business you designate to be the health insurance plan sponsor.
(limited to self employment income BUT excess premiums can be itemized deductions on Schedule
A.)
NOT a business deduction.. its a personal deduction.
Self employment tax - deductible for AGI
self employed people have to pay both halves of the SS and Medicare tax. This tax is not deducted on
Schedule C for the owner, but 1/2 of these taxes are deductible on Schedule 1 of 1040. Reduces
income dollar for dollar.
Penalty for early withdrawals of savings - If you withdraw money from a certificate of deposit (CD) or
other time-deposit savings account before your certificate matures, you'll probably have to pay a
penalty. It's charged by the bank or financial institution, and it's withheld directly from your proceeds
from the certificate of deposit.
The penalty is deductible because it affects the amount of interest you earn.
