1.

(TCO E) For federal tax purposes, royalty income that is not derived in the ordinary course of a
business is classified as: (Points : 5)

portfolio income.
active income.
passive income.
None of the above

Question 2.2. (TCO F) When comparing corporate and individual taxation, the following statements are
true, except: (Points : 5)

Individuals have exemptions and a standard deduction; corporations do not.

Both corporate and individual taxpayers may have a long-term capital loss carryforward.
All taxpayers may carry net operating losses back two years, forward 20 years.
Both types of taxpayers have percentage limitations on the charitable contribution deduction,
coupled with a carryover of the excess contribution.

Question 3.3. (TCO H) Charles and Marcia are married cash-basis taxpayers. In Year 8, they had

interest income as follows (Becker CPA Review Course):

$500 interest on federal income tax refund.

$600 interest on state income tax refund.

$800 interest on federal government obligations.

$1,000 interest on state government obligations.

What amount of interest income is taxable on Charles and Marcia's Year 8 joint income tax
return? (Points : 5)
$500
$1,100
$1,900
$2,900

Question 4.4. (TCO B) A contribution made to the following donee is not deductible. (Points : 5)

Boy Scouts of America

Oxford University, England
Society for the Prevention of Cruelty to Animals
Michigan State University
California State Fair (an activity of the State of California)

Question 5.5. (TCO A) The following taxes were paid by Tim:

Real estate taxes on his home: $2,000

State income taxes: $900
State gasoline tax (personal use of automobile): $150
In itemizing his deductions, what is the amount that Tim may claim as a deduction for taxes? (Points : 5)
$2,000
$2,900
$3,050
$0

Question 6.6. (TCO F) Hoover, Inc. had gross receipts from operations of $230,000, operating and other

expenses of $310,000, and dividends received from a 45 percent-owned domestic corporation of

$120,000. Hoover's tax position for the year is: (Points : 5)
$8,000 taxable income.
$56,000 net operating loss.
$40,000 taxable income.
$80,000 net operating loss.

Question 7.7. (TCO G) Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an

S Corporation in which Lane does not materially participate, and a $35,000 passive loss from a real
estate rental activity in which Lane materially participated. Lane's modified adjusted gross income was
$165,000. What amount of the real estate rental activity loss was deductible? (Becker CPA Review
Course) (Points : 5)
$0

$25,000
$15,000
$35,000

Question 8.8. (TCO G) Mike, who is single, has $100,000 of salary, $15,000 of income from a limited

partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates.
His modified adjusted gross income is $100,000. Of the $30,000 loss, how much is deductible? (Points :
5)

$30,000
$10,000
$25,000
$0

9. In case of the sole proprietorship all losses/income pass to the owner.

This this case Pam can carry back the operating losses to two years to offset her
income and can get refund from the IRS. In some cases, she can carry back tree
years if the operating loss is the result of theft or a casualty. If any amount of loss is
left she can use it in the next year, if there is still some amount of loss left she can
use it against the future income for next twenty years. She can also waive her carry
back right only carry forward to twenty years to offset her losses again her future
income
Pam may deduct a net capital loss up to $3,000 annually against ordinary income
and she must carry the excess over $3,000 to the following tax year. She may not
carry a capital loss back to a prior year. However, she may carry an excess loss over
$3,000 forward indefinitely until it is used up.

Any losses form the C Corporation does not pass to the shareholders. The C
Corporation is a separate legal entity and corporation itself is responsible for the
losses. Shareholders dont get any personal deduction from the any kind losses of
the corporation. C Corporation can use this income to offset its losses against its
past or future income. Therefore Kevin will not be affect for any operating or capital
losses of the C Corporation.
10.

a.
Net operating losses occur when the business expenses are greater than the
business income. In other word, when in a business the allowable taxable deduction
are greater that the taxable income the results will a net operating loss.
Individual can carry back the operating losses to two years to offset his/her income
and can get refund from the IRS. In some cases, he/she can carry back tree years if
the operating loss is the result of theft or a casualty. If any amount of loss is left
he/she can use it in the next year, if there is still some amount of loss left that can
be used against the future income for next twenty years. He/she can also waive his/
her carry back right only carry forward to twenty years to offset the losses again the
future income
In case corporations, they can also carry back net the operating loss to 2 years and
carry forward to 20 years offset the losses against the income.
b.
The at-risk rules do not allow using deduction for losses that are in excess of an
amount at risk for an investor. At risk amount of an investment is that an investor
can possibly lose. The at-risk rules apply to individuals as well as closely held
corporations. It is calculated as follows:
Cash invested + Adjusted basis of other property invested + Borrowings for which
investor is personally liable + Borrowings for which investor has pledged collateral
+ Allocated portion of income Allocated portion of losses Withdrawals = Amount
at risk
For example, Kevin gave $20,000 cash, pledged $20,000 for security of a
partnership loan, and gave a computer with an adjusted basis of $10,000 for his
interest in a limited partnership. His amount at risk is $50,000. The activity
allocated a $70,000 loss (passive loss) to her. Only $50,000 (the amount at risk) of
the $70,000 loss can be used to offset income from other passive activities during
the year. Since she is not at risk for the remaining $20,000, it is carried over into a
future tax year until she becomes at risk, which would then free up this amount to
be offset against passive income.
c.
A tax shelter is a legal strategy to reduce the amount of income taxes owe. It is an
activity providing deductions to an investor which will reduce tax liability with
respect to income. Claiming deductions is a legal way to reduce the amount of
income tax to be paid to the IRS
For example, an individual may pay college tuition expenses with a student loan
rather than a credit card and take advantage of the student loan interest deduction.

An individual may make a large number of charitable donations during the year and
take deduction income tax bill. In addition to claiming deductions, an individual can
also shelter income from tax by choosing investments that provide the maximum
tax savings by deducting a certain amount of contributions to a traditional IRA
account. In addition, tax deferral on all investment income and gains in the IRA
account may not be subjected to income tax until one retire and start making
withdrawals.