|
What's New for 2006
Tax rates and maximum net earnings
1. The maximum net self-employment earnings subject to the social security portion (12.4%) of the self-employment tax increased to $94,200 for 2006.
A. True
B. False
Elective
deferrals
2. For 2006, the maximum amount of elective deferrals under a salary reduction agreement that could be contributed to a qualified plan if age under 50 increased to:
A. $12,000
B. $13,000
C.
$14,000
D.
$15,000
SIMPLE plan salary reduction contributions
3. For 2006, the limit on salary
reduction contributions to a SIMPLE plan increased to $10,000 ($12,500 if you were age 50 or older).
A. True
B. False
What's
New for 2007
Meal expense deduction subject to "hours of service" limits
4. For 2007, this deduction is unchanged at 75% of the reimbursed meals your employees consumed while they were subject to the Department of Transportation's "hours of service" limits>
A. True
B. False
Compensation Limit
5. The maximum compensation used for figuring contributions and benefits for a retirement plan will increase from $220,000 to $225,000 for 2007.
A. True
B. False
Deducting Business Expenses
What Can I Deduct?
6. To be deductible, a business expense must be both ordinary and
necessary.
A. True
B. False
Costs of Goods Sold
7. The cost of storing the products you sell is not a
type of cost that goes into figuring cost of goods
sold.
A. True
B. False
8. Uniform capitalization rules do not apply to
personal property you acquire for resale if your average
annual gross receipts for the preceding 3 tax years
are not more than $10 million.
A. True
B. False
Capital Expense
9. Costs which must be capitalized, rather than deducted
currently include all of the following except:
A. Going into business
B. Business assets
C. Improvements
D. Expenses for advertising, utilities, repairs and
wages after you actually begin business operations
Cost Recovery
10. Although you generally can not take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion.
A. True
B. False
Improvements
11. All of the following costs must be capitalized
except:
A. New electric wiring
B. New floor
C. New plumbing
D. Machine replacement parts that only keep it in normal
operating condition
Capital versus Deductible Expenses
Motor vehicles
12. Repairs to business vehicles that recondition or
overhaul are capital rather than deductible expenses.
A. True
B. False
Roads and driveways
13. The cost of maintaining a private road on your
business property must be capitalized.
A. True
B. False
Tools
14. Tools purchased with a life expectancy of more than
1 year must be capitalized.
A. True
B. False
Business Use of Your Home
15. Your home office qualifies as your principal place of business
if you meet the following requirements:
A. You use the office exclusively and regularly for administrative
or management activities of your trade or business
B. You have no other fixed location where you conduct substantial
administrative or management activities of your trade or business
C.
Both A and B
D.
Neither A or B
Business Use of Your Car
16. Barry is self-employed and uses his car for his business. If Barry
claims the standard mileage rate, he can not also
deduct the business part of interest on his car loan.
A. True
B. False
Payments in Kind
17. Bill Bates paid a $5,000 expense in goods by
transferring software costing $35,000 to a vendor. The
value of the software was only $3,000 due to changes
in technology. The amount Bill can deduct is:
A. $5,000
B. $35,000
C. $3,000
Not-for-Profit Activities
18. A loss from a not-for-profit business activity can
not be used to offset other income for all of the
following except:
A. corporations other than S corporations
B. individuals
C. partnerships
D. estates
E. S corporations
19. Business activity expenses are not deductible
unless the business meets the presumption of profit
rules.
A. True
B. False
20. Factors considered to determine whether an
activity is carried on to make a profit include:
A. Business like manner of the activity
B. Time and effort indicating intent to make a profit
C. Dependence on the activity to make a living
D. Past success in making a profit in similar activities
E. All of the above
Presumption of Profit
21. A business other than one involving horses, is
presumed carried on for a profit if it produced a
profit
A. 1 year of the last 4
B. 2 years of the last 5
C. 2 years of the last 7
D. 3 years of the last 5
22. If your business passes the years-of-profit test,
you can take all your deductions from the activity
including for the years that you had a loss.
A. True
B. False
Employees Pay
Tests for
Deducting Pay
23. To be deductible, your employee's pay must be:
A. Ordinary and necessary
B. Paid or incurred in the tax year
C.
Reasonable pay
D.
For services performed
E.
All of the above
Reasonable
24. The general cost of living in the locality is not a
factor to consider to prove the pay is reasonable.
A. True
B. False
Test 2-For Services Performed
Employee-shareholder salaries
25. If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive distribution to employee-shareholder.
A. True
B. False
Employee Achievement
Awards
26. Your deduction for the cost of employee achievement awards given
to any one employee during the tax year is limited only for awards
that are not qualified plan awards.
A. True
B. False
Bonuses
Gifts of nominal value
27. Crown Co. distributes turkeys valued at $25 each to
employees at Christmas. Crown Co. can only deduct the
value of these turkeys as a business expense if they
include the amount in employee income.
A. True
B. False
Education Expenses
28. If you pay employee education expenses that is not
related to the employee's job, you can deduct them as
wages.
A. True
B. False
Meals and Lodging
29. Jessica operates a restaurant that furnishes
employees meals at the restaurant. Jessica's deduction
is limited to 50% of the costs of furnishing these
meals.
A. True
B. False
Employee benefit programs
30. Employee benefit programs that you can deduct generally include educational assistance programs.
A. True
B. False
Loans or Advances
31. You can deduct as wages, a loan you make to an
employee that performs personal services if you do not
expect the
employee to repay it.
A. True
B. False
Property
32. You can not deduct as wages, property transferred to
an employee as payment for services.
A. True
B. False
33. A corporation that transfers its own stock to an
employee for wages, must recognize a gain or loss on
such transfer.
A. True
B. False
Restricted property
34. To be deductible, property transferred to an
employee must be substantially vested in the employee
after transfer.
A. True
B. False
Reimbursements for Business Expenses
35. Your deduction for meal and entertainment expenses
is usually limited to 50% of the payment to reimburse
employees.
A. True
B. False
36. If you make payment of employee business expenses
under an accountable plan, you deduct it as wages on
your tax return or business schedule.
A. True
B. False
Sick Pay
37. You can deduct amounts you pay to employees for
sickness or injury including amounts compensated by
insurance.
A. True
B. False
Vacation Pay
38. You can generally deduct vacation pay only in your
tax year in which the employee receives it, whether
you are a cash or accrual basis taxpayer.
A. True
B. False
Rent Expense
Rent
39. Rent is considered unreasonable and therefore non-deductible if it is figured as a percentage of gross sales.
A. True
B. False
Related Persons
40. For determining reasonableness of rent, related persons does not include an individual and a corporation if the individual owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation.
A. True
B. False
Rent on your home
41. If you rent your home or use part of it as your place of business, you may not deduct the rent you pay for that part.
A. True
B. False
Rent paid in advance
42. Generally, rent paid in your trade or business is deductible in the year paid or accrued and if paid in advance, you can only deduct the amount that applies to your use of the rented property during the tax year.
A. True
B. False
43. You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. Your rent is $12,000 per year. You paid the first year's rent ($12,000) on June 30th. How much can you deduct for rent the first year?
A. $12,000
B. $6,000
C. None as rent is a capital expense.
44. You are a calendar year taxpayer. Last January you leased property for 3 years for $6,000 per year. You paid the full $18,000 (3 X $6,000) during the first year of the lease. Each year you can deduct only $6,000, the part of the lease that applies to that year.
A. True
B. False
Canceling a lease
45. You generally can not deduct as rent an amount you pay to cancel a business lease.
A. True
B. False
Lease or Purchase
46. Marx Incorporated entered into an agreement to
occupy a building with an option to buy the property
at the end of 6 years. The option price is nominal
compared to the value of the property when the option
can be exercised. The agreement designates part of
payments as interest. In general, these terms indicate
intent of the parties for this agreement to be
considered _______________ and payments are
____________________.
A. a lease; not deductible
B. a lease; deductible
C. a conditional sales contract; deductible
D. a conditional sales contract; not deductible
Conditional sales contract
47. Whether an agreement is a conditional sales contract depends on the intent of the parties.
A. True
B. False
48. An agreement will not be considered a conditional sales contract rather than a lease if the agreement applies any part of each payment toward an equity interest you will receive.
A. True
B. False
Leveraged leases
49. Leveraged lease transactions may not be considered leases if the lessor maintains an unconditional "at risk" equity investment in the property of less than 20% of the cost of the property during the entire lease term.
A. True
B. False
Leveraged leases of limited-use property
50. The IRS will not issue advance rulings on leveraged leases of so-called limited use property.
A. True
B. False
Taxes on Leased Property
51. If you lease business property, you can not deduct
as additional rent any taxes that you have to pay
directly or that the lessor pays.
A. True
B. False
Cash Method
52. If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them.
A. True
B. False
Cost of Getting
a Lease
Option
to renew
53. Jeffries Corp paid $20,000 to get a lease with 10 years remaining
and two options to renew for 5 years each. Of this cost, $10,000 was
paid for the original lease and $10,000 was paid for the renewal options.
Jeffries Corp must amortize the $20,000 over 20 years.
A. True
B. False
Cost of a modification agreement
54. Hanson Industries negotiated to reduce space with
its landlord. The lease has 20 years remaining. Hanson
agreed to a $2,000 fee payable over 5 years, to get
out of renting a portion of its existing space. The
$2,000 cost of this modification:
A. is deductible when paid
B. must be amortized over 5 years
C. must be amortized over the remaining 20 years of the
original lease
Commissions, bonuses, and fees
55. Commissions, bonuses, fees and other amounts you pay to get a lease on property you use in your business are capital assets that you must amortize over the term of the lease.
A. True
B. False
Improvements by Lessee
56. If you add buildings or make other permanent
improvements to leased property, you can amortize the
cost over the remaining term of the lease.
A. True
B. False
Assignment of a lease
57. If a long-term leasee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment.
A. True
B. False
Capitalizing Rent Expenses
58. Artel Corp rents space in a facility to conduct its
business of manufacturing the picture frames for sale
to its customers. Artel is subject to Uniform
Capitalization Rules and must include rent paid to
occupy the facility in the cost of picture frames
produced.
A. True
B. False
Interest
Allocation of Interest
Secured Loan
59. Mary obtained a loan in the amount of $10,000
against her personal automobile. Mary used the money
to purchase property used in her business. Mary must
allocate interest expense on the loan to personal use
rather than busines because the loan is secured by
personal property.
A. True
B. False
Interest on segregated account
60. If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest.
A. True
B. False
Loan Repayments
61. Jody obtained a $20,000 loan and used one half for
her business and the other half for personal use. This
year, Jody repaid $5,000 of the loan. The loan
repayment should be allocated:
A. The same as use of the proceeds (50% to personal
and 50% to business)
B. $5,000 to personal
C. $5,000 to business
Line of Credit (Continuous Borrowings)
62. Jackie has a line of credit that allows her to
borrow funds periodically under a single loan
agreement. Each borrowing accrues interest at different
variable rates of interest. IRS rules require each
borrowing to be treated as different loans.
A. True
B. False
Interest You Can Deduct
63. If the property that secures a loan is not related
to your trade or business, you can not deduct the
interest even though you use the proceeds of the loan
for a trade or business expense.
A. True
B. False
Expenses paid to obtain a mortgage
64. Mortgage commissions, abstract fees, and recording fees you pay to obtain a mortgage and can be deducted as interest rather than capital expenses.
A. True
B. False
Original Issue Discount
65. A loan has original issue discount when its proceeds
are less than its principal amount.
A. True
B. False
Interest you cannot deduct
Interest on loans with respect to life insurance
policies
66. You can deduct the interest on up to $50,000 of debt
for a policy that covers a key person.
A. True
B. False
Capitalization of Interest
67. Prismo Co. builds trailers with a production period
of 30 days. The trailers have a class life of less
than 20 years. Under the Uniform Capitalization Rules,
Prismo Co. is not required to capitalize interest on
debt used to finance this production.
A. True
B. False
When to deduct interest
Prepaid Interest
68. Spree Corp is a cash method taxpayer. Spree Corp
prepays interest on a loan. The interest was not due
until the following year. Spree Corp may not deduct
this payment until the following year when it is due.
A. True
B. False
Related Persons
69. Mark is an accrual method taxpayer who owes interest
on money borrowed for his business to his brother
Bill. Bill is a cash method taxpayer. Interest on the
loan was $12,000 during the year. The interest payment
has been deferred until the loan term ends in two
years. Mark can take a tax deduction for the current
tax year of $12,000.
A. True
B. False
Below-Market Interest Rate Loans
Limit on forgone interest for gift loans of
$100,000 or less
70. Mary received a gift-loan from her father to buy a
house. The loan amount was $100,000 payable monthly
for 30 years with no interest. Mary had $1,000 of
net-investment income from the loan funds prior to
purchasing a house. Avoidance of federal tax was not a
purpose of the interest arrangement. Under the rules
for below-market interest rate loans, the forgone
interest that must be included in her father's income
is:
A. $0
B. $1,000
Real Estate Taxes
Taxes
for local benefits
71. Taxes for local benefits and improvements that increase the value
of your property cannot be expensed and must be added to the basis
of your property.
A. True
B. False
Election to ratably accrue
72. Blake is an accrual method taxpayer. He can choose
to accrue real estate tax that is related to a
definite period ratable over that period.
A. True
B. False
Other Taxes
Sales
Tax
73. You can deduct state and local taxes imposed on buyers and that
you must collect from the buyer and pay over to the state or local
government.
A. True
B. False
Insurance
74. You generally can deduct the ordinary and necessary cost of insurance
as a business expense if it is your trade, business, or profession.
A. True
B. False
Deductible Premiums
75. You can not generally deduct premiums you pay for
employee group long term care insurance.
A. True
B. False
Self-Employed
Health
Insurance Deduction
76. You may be able to deduct 100% of qualified long-term care insurance
for you, your spouse, and your dependants if you are a self-employed
individual with a net profit reported on Schedule C, C-EZ, or F.
A. True
B. False
Long-term care insurance
77. Carla is 41 years old at the end of the current tax
year and self-employed. Her maximum business expense
deduction for long-term care insurance premiums
(notwithstanding the business net earnings or other
coverage limitation) is the lessor of the amount she
paid or:
A. $210
B. $530
C. $800
D. $2,120
Other coverage
78. You cannot take a deduction for self-employed health
insurance for any month you were eligible to
participate in any employer subsidized health plan at
any time during that month.
A. True
B. False
Nondeductible Premiums
79. Business risk self-insurance reserve premiums are a
deductible expense.
A. True
B. False
Insurance to secure a loan
80. Ron and Alan acquired a business. To get the loan
needed for the acquisition, they were required by the
bank to take out life insurance policies that would pay
off the loan if either died. The interest on this loan
is a deductible business expense.
A. True
B. False
When to deduct premiums
Cash or accrual method prepayments.
81. If you are a cash method taxpayer, you can deduct in
one year the entire premium for an insurance policy
that covers more than one year.
A. True
B. False
Costs You Can Deduct
or Capitalize
Research
and Experimental Costs
82. If you choose to deduct research and experimental costs as a current
business expense, you must deduct all such costs consistently in later
years.
A. True
B. False
Intangible Drilling Costs
83. Intangible drilling costs can be deducted currently
by taking the deduction for the first year of eligible
costs on your tax return without a formal statement
indicating the election.
A. True
B. False
Exploration Costs
84. An S-corporation can deduct only 70% of its domestic
exploration costs and must capitalize the remaining
30%.
A. True
B. False
Circulation Costs
85. A publisher can deduct as a business expense the
cost of increasing circulation of a newspaper or other
periodical by purchasing another publisher's
subscriber list.
A. True
B. False
Barrier Removal Costs
86. You can deduct currently rather than capitalize up
to $15,000 of eligible costs of removing barriers to
the disabled and the elderly in a single tax year.
A. True
B. False
Amortization
87. You do not have to file Form 4562 to claim
depreciation on property placed in service or to start
claiming amortization this year.
A. True
B. False
Starting a Business
88. You can choose to amortize business startup costs
over a period of 60 months or more.
A. True
B. False
Business
Start-up Costs
89. Advertisements for the opening of the
business is not amortizable as a qualifying start-up cost.
A. True
B. False
Costs of Organizing
a Corporation
90. Costs of issuing and selling stock, such as commissions, professional
fees and printing costs can be amortized under organizational costs.
A. True
B. False
How
To Amortize
Cash
method partnership
91. A parternship using the cash method
of accounting cannot deduct an organizational cost incurred until
the year of payment.
A. True
B. False
Section 197 Intangibles
92. Goodwill is a Section 197 intangible asset that
cannot be amortized when you create rather than
purchase it.
A. True
B. False
Government granted license, permit, etc.
93. Environment Inc. obtained government granted
licenses and permits to clean up contaminated
property. These licenses and permits expire in 3 years.
The costs incurred to acquire these licenses and
permits are Section 197 intangibles.
A. True
B. False
Anti-Churning Rules
94. Anti-churning rules allow you to amortize most
section 197 intangibles, even though the transaction
in which you acquired them did not result in a
significant change in ownership or use.
A. True
B. False
Disposition of Section 197 Intangibles
95. If you dispose of Section 197 intangible property
held for more than one year, any gain up to the amount
allowable amortization is:
A. ordinary income (Section 1245 gain)
B. capital gain (Section 1231 gain)
Research and Experimental Costs
96. Research and experimental costs are eligible for:
A. deduction as current business expenses
B. amortization in equal amounts over 60 months
C. deduction ratably over a 10 year period, beginning
with the tax year in which you incurred the costs
D. all of the above
Depletion
Important Reminder
Introduction
97. The two methods for figuring depletion of natural resources are:
A. cost and MACRS depletion
B. MACRS and straight line average life depletion
C. cost and percent depletion
D. none of the above
Alternative
minimum tax
98. Individuals, corporations, estates, and trusts who claim depletion
deductions may be liable for alternative minimum tax.
A. True
B. False
Oil and Gas Wells
99. Refiners of more than 75,000 barrels on any day
during the tax year can claim percentage depletion.
A. True
B. False
Mines and other natural deposits
100. Clay used or sold for use in making drainage and
roofing tile qualifies for percentage depletion
against gross income of:
A. 22%
B. 7.55
C. 5%
D. 0%
Delay Rentals
101. As a lessor of oil property, your income from
deferring development of the property is subject to
depletion.
A. True
B. False
Timber
102. The percent depletion method is the preferred method
for timber depletion.
A. True
B. False
Business Bad Debts
103. Non-business bad debts are deductible as short-term
capital losses on Schedule D (Form 1040).
A. True
B. False
Cash
method
104. Cash method taxpayers that report
income when they receive it can take a bad debt deduction on accounts
they cannot collect.
A. True
B. False
105. Ron makes a capital contribution to a corporation
for ownership. The capital contribution is recorded as
a loan. The corporation went out of business and Ron did
not receive anything for his investment. Ron can take
a bad debt deduction.
A. True
B. False
When Debt is Worthless
Property received for debt
106. Jerry received property as partial payment of a
debt. He deducted the remaining debt as bad debt.
Jerry later sold the property for a gain. The gain is
considered recovery of a bad debt and must be included
in gross income.
A. True
B. False
Recovery of a Bad Debt
107. If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income.
A. True
B. False
Net operating loss (NOL) carryover
108. If a bad debt deduction increases NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax.
A. True
B. False
Other Expenses
What's New - Standard mileage rate
109. The standard mileage rate for the cost of operating your car, van, or panel truck in 2006 isx 44.5 cents a mile for all business miles.
A. True
B. False
Other Expenses
Travel, Meals and Entertainment
Reimbursements
110. Reimbursement to employees under a
non-accountable plan for travel, meals and entertainment
expenses requires you to report the reimbursements as
wages on Form W-2.
A. True
B. False
Accountable Plans
111. An accountable plan requires your employees to adequately account to you for reimbursable expenses within a reasonable time to avoid having the reimbursement included as wages on Form W-2.
A. True
B. False
Reporting per diem and car allowances
112. If the per diem allowance your company provides
employees is below the federal rate, the allowance is
part of employees pay and is deducted as wages.
A. True
B. False
Meals and Entertainment
Related
expenses
113. Reimbursement under an accountable plan for cost of transportation
to a from a sporting event that is otherwise allowable is subject
to the 50% limit.
A. True
B. False
Miscellaneous Expenses
Anticipated Liabilities
114. Meyer's Service Station sold one-year service
contracts to auto owners. Historically, Meyers knows
they will have expenses of 30% of contract revenue in
the coming year for these contracts. Meyers is an
accrual basis taxpayer. Meyers may deduct 30% of the
service contract revenue by charging expenses to a
reserve account.
A. True
B. False
Charitable Contributions
Club dues and membership fees
115. Generally amounts paid or incurred to membership in any club
organized for business, pleasure, recreation, or any other social
purpose are not deductible.
A. True
B. False
Education Expenses
116. You can only deduct your own education expenses if
they are to maintain or improve skills required in
your trade or business or required by law or
regulation to keep your job.
A. True
B. False
Lobbying Expenses
117. You generally can deduct lobbying expenses.
A. True
B. False
Telephone
118. If you have an office in your home, you may deduct the cost of
basic local telephone service.
A. True
B. False
Course Evaluation
119. Indicate your professional designation.
A. CPA
B. Public Accountant
C. Enrolled Agent
D. Other___________________
120. Indicate years professional experience in the
course subject matter.
A. Less than 5
B. 5 to 10 years
C. 11 to 15 years
D. 16 to 20 years
E. 21 and over
121. Did the program meet your learning objectives?:
A. Yes
B. No
122. Did the program materials contribute to the
achievement of your learning objectives?
A. Yes
B. No
123. Did you find the program content relevant and
timely?
A. Yes
B. No
124. Was the difficulty of the questions:
A. about right
B. too easy
C. too difficult
125. Was the indicated prerequisites (if any) for the
program appropriate?
A. Yes
B. No
126. Do you plan to use additional courses from CPE
Accounting & Tax Institute.
A. Yes
B. No
|