Tax Accounting Practice Test! Trivia Quiz

If medical expenses were claimed as a deduction in the previous year, they must be included in income in the year of recovery. This is because the deduction decreased taxable income in the year they were deducted, so it is only fair to include them as income when they are recovered. Therefore, the statement is true.

MACRS depreciation refers to the depreciation method used for tax purposes, while depreciation allowed for computing AMT (Alternative Minimum Tax) refers to the depreciation method used for calculating the AMT. These two methods can result in different depreciation deductions, leading to a permanent difference between taxable income (calculated using MACRS) and AMTI (calculated using depreciation allowed for computing AMT). This difference affects the amount of tax owed, making the statement true.

Chiropractic services are considered a form of medical treatment, and therefore the fees paid to chiropractors can be considered as deductible medical expenses. This means that individuals may be able to deduct these expenses from their taxable income, potentially reducing their overall tax liability.

The explanation for the given correct answer is that when there is partial destruction of business property, the deduction is limited to the lesser of the adjusted basis of the property or the decline in fair market value. This means that the amount that can be deducted for the loss is based on the lower value between the original cost of the property (adjusted basis) and the decrease in its value after the casualty. Therefore, the statement is true.

Itemized deductions refer to specific expenses that can be deducted from a taxpayer's taxable income, such as medical expenses, mortgage interest, and charitable contributions. These deductions are only beneficial if they exceed the standard deduction amount, which is a fixed amount that can be deducted by all taxpayers regardless of their expenses. Therefore, if a taxpayer's itemized deductions are less than or equal to the standard deduction amount, it would be more advantageous for them to take the standard deduction instead. Hence, the statement is true.

Hobby expenses are generally deductible only to the extent of the income generated by the activity. This means that if the expenses incurred for a hobby exceed the income earned from it, the excess expenses cannot be deducted from taxable income. This is because the IRS considers hobbies as personal activities rather than business activities, and therefore, does not allow deductions for hobby expenses that exceed hobby income.

Ad valorem personal property taxes refer to taxes that are based on the value of personal property, such as vehicles or boats. These taxes can be deducted as an itemized deduction on a person's tax return. Therefore, the statement is true.

Individual taxpayers are indeed allowed to deduct unreimbursed medical and dental expenses paid during the year for themselves, their spouse, and dependents. This deduction is subject to certain limitations and must meet the criteria set by the Internal Revenue Service (IRS). Taxpayers can include expenses such as doctor visits, prescription medications, and hospital stays. However, it is important to note that the expenses must exceed a certain percentage of the taxpayer's adjusted gross income (AGI) before they can be deducted.

Personal expenses are only deductible if the tax laws specifically state that they are. This means that individuals can only claim deductions for their personal expenses if the tax laws explicitly allow them to do so. If the tax laws do not mention or allow for the deduction of personal expenses, then individuals cannot deduct them from their taxable income. Therefore, the statement "Personal expenses are only deductible if the tax laws specifically state that they are" is true.

The statement is true because it states that qualified second-year wages paid to a long-term family recipient can qualify for the work opportunity credit. This means that even in the second year of employment, if the wages are paid to a long-term family recipient, they can still be eligible for the credit.

Foreign income taxes paid to a foreign country can be claimed as a credit against United States income tax or deducted as an itemized deduction. This means that individuals who have paid taxes on their foreign income can either reduce their US tax liability by claiming a credit for the amount of foreign taxes paid or choose to deduct the foreign taxes as an itemized deduction on their US tax return. Therefore, the statement is true.

If an employee's salary is deemed "unreasonable," it means that it exceeds what would be considered fair or justifiable for the work performed. In such cases, this excessive portion of the salary may be treated as a dividend distribution to the employee, particularly if they are also a shareholder of the corporation. This means that the excess amount is being paid out to the employee as a form of profit sharing, similar to how dividends are distributed to shareholders. Therefore, the statement "The portion of an employee's salary deemed 'unreasonable' may be considered a dividend distribution to an employee that is also a shareholder of the corporation" is true.

The work opportunity credit is a tax credit that employers can claim for hiring individuals from certain targeted groups who have faced barriers to employment. This credit reduces the employer's tax liability. Therefore, if an employer claims the work opportunity credit, their wage deduction will be reduced by the amount of the credit claimed. This means that the employer will have a lower deduction for wages paid to employees, resulting in a higher taxable income.

The statement is true because according to the IRS, when determining whether a taxpayer materially participates in an activity, the participation of their spouse is taken into account. This means that if the taxpayer's spouse is actively involved in the activity, it can contribute to the taxpayer meeting the material participation requirements.

Farmers are allowed to carryback a net operating loss (NOL) for three years. This means that if a farmer experiences a loss in one year, they can apply that loss to reduce their taxable income in the previous three years, potentially resulting in a tax refund. This provision helps farmers to offset losses during difficult years and provides them with some financial relief. Therefore, the statement is true.

This statement is true. Certain individuals can indeed get a refundable tax credit of 40 percent of their earned income. This means that they can receive a refund even if they have no tax liability or if the credit exceeds the amount of taxes owed.

Embezzlement losses are deductible in the year of discovery because they are considered theft losses. According to tax laws, theft losses are deductible in the year they are discovered, rather than the year the theft occurred. This allows taxpayers to offset their taxable income by the amount of the embezzlement losses, providing some relief from the financial impact of the theft. Therefore, the statement "Embezzlement losses are deductible in the year of discovery" is true.

To qualify for a business use of home deduction, it is necessary to exclusively use a portion of a home for business purposes. This means that the space must be used solely for conducting business activities and cannot be used for any personal purposes. If the home office is used for both personal and business activities, it would not meet the requirement for the deduction. Therefore, the statement is true.

Vitamin pills taken daily for general health are not considered qualified medical expenses. Qualified medical expenses are expenses that are necessary for the diagnosis, treatment, or prevention of a specific medical condition. While vitamins and supplements may be beneficial for overall health, they are not considered necessary for the treatment or prevention of a specific medical condition and therefore do not qualify as a medical expense.

Expenses related to job-seeking are not deductible if an individual is searching for work in a new trade or business. This means that if someone is looking for a job in a different industry or field, they cannot claim deductions for expenses incurred during their job search. However, if someone is looking for a job in the same trade or business, they may be eligible to deduct certain expenses, such as resume preparation or travel costs for interviews.

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In MACRS (Modified Accelerated Cost Recovery System) depreciation, the salvage value is indeed ignored. MACRS is a method used in the United States to determine the depreciation deductions for tax purposes. It assumes that an asset has no salvage value at the end of its useful life, meaning it is fully depreciated. This allows for a faster depreciation deduction over a shorter period of time, resulting in a larger tax benefit for the taxpayer. Therefore, the correct answer is true.

Cigarette tax is not deductible when itemizing. This is because the IRS only allows deductions for certain taxes, such as state income tax and real property tax. Cigarette tax is not considered a deductible tax expense. Therefore, it cannot be claimed as a deduction when itemizing expenses.

Percentage depletion is a tax deduction method used for natural resource properties, such as oil wells or mines. It allows the taxpayer to deduct a certain percentage of the gross income generated from the property. Unlike cost depletion, which considers the adjusted basis of the property, percentage depletion is calculated based solely on the gross income. Therefore, the statement that percentage depletion is computed without regard to the adjusted basis of the property being depleted is true.

If a taxpayer is married on the last day of the tax year, they must file a joint return in order to claim a dependent care credit. This is because the dependent care credit is only available to married couples filing jointly, and cannot be claimed on separate returns. Therefore, if the taxpayer is married, they must file a joint return to be eligible for the credit.

Federal income taxes paid are not deductible as an itemized deduction on an individual's federal income tax return. However, there are some state and local income taxes that may be deductible if you itemize your deductions on your federal tax return, but the federal income tax itself is not deductible. The Tax Cuts and Jobs Act (TCJA) that went into effect in 2018 eliminated the deduction for most state and local taxes, including state and local income taxes, for federal tax purposes. It's essential to consult a tax professional or the most current IRS guidelines for specific tax advice and rules, as tax laws can change over time.

For 2010, the mileage allowance is 50 cents per mile.
For 2011, the mileage allowance is 51 cents per mile.

No deduction is allowed for amounts paid or incurred for dues and fees paid to social, athletic, sporting, or country clubs.

The passive loss may offset the C corporation's active (business) income but not its portfolio income.

The term "research and experimentation expenditures" for tax purposes includes the development of a plant process. This means that any expenses incurred in the research and development of a new or improved plant process can be considered as research and experimentation expenditures for tax purposes. This can include costs related to designing, testing, and refining the plant process. However, efficiency surveys, management studies, and advertising expenses are not considered as research and experimentation expenditures for tax purposes.

Transportation costs for a child between the taxpayer's household and the child care location are not allowable child care expenses.

Miscellaneous itemized deductions are deductible only to the extent that in aggregate they exceed two percent of AGI. This means that taxpayers can only deduct these expenses if they exceed two percent of their adjusted gross income (AGI). For example, if a taxpayer has an AGI of $50,000, they can only deduct miscellaneous itemized deductions that exceed $1,000 (two percent of $50,000). Any expenses below this threshold cannot be deducted.

The deductions for business gifts are limited to $25 per individual each year. This means that businesses can only deduct up to $25 for each gift they give to an individual as a business expense. Any amount beyond $25 will not be eligible for deduction.

An individual who pledged $500 to the church to be paid next year is not allowed a charitable contribution deduction in the year pledged. Charitable contribution deductions can only be claimed in the year that the donation is actually made, not in the year that it is pledged. Therefore, the correct answer is False.

A taxpayer cannot claim a transportation deduction equal to 50 cents per mile traveled in a passenger automobile for business purposes. The current standard mileage rate for business use of a car is 56 cents per mile in 2021, as determined by the IRS. Therefore, the statement that a taxpayer can claim a deduction of 50 cents per mile is false.

General business credits must be carried back first.

A married taxpayer is not required to file a joint return in all circumstances in order to be eligible for the earned income credit. While filing a joint return can potentially increase the amount of the earned income credit, married taxpayers may also be eligible for the credit if they file separate returns. The eligibility criteria for the earned income credit are based on factors such as income, filing status, and the number of qualifying children.

Education expenses which qualify an individual for a new trade or business are not always deductible for tax purposes. While some education expenses may be deductible, such as those that maintain or improve skills required in the individual's current job, expenses that are incurred to meet the minimum educational requirements for a new trade or business are generally not deductible. Therefore, the given statement is false.

The gain from the sale of property that produces portfolio income is also classified as portfolio income.

Prepaid interest payments cannot be deducted in the year of payment regardless of the taxpayer's accounting method. The deduction for prepaid interest is generally spread out over the life of the loan or the period to which the interest applies. Therefore, taxpayers must allocate the prepaid interest expense over the applicable period rather than deducting it all in the year of payment.

The general business credit that exceeds the income tax liability can be carried back one year and carried forward for up to 20 years. This means that the excess credit can be used to offset the income tax liability from the previous year, and any remaining credit can be carried forward and applied against future income tax liabilities for up to 20 years. This allows the company to effectively utilize the excess credit over a longer period of time.

The IRS does not consider the taxpayer's preference for the principal place of business when determining it. Instead, they consider factors such as the amount of time spent at each location, the degree of business activity at each location, and the amount of income generated at each location.

The Section 179 deduction is limited to $500,000 in 2011 or $450,000 in this case. It is reduced to the extent that acquisitions of eligible personal property exceed $2,000,000.

The correct answer is False. Theft losses can be deducted in the year they are discovered, not necessarily in the year the theft occurred. This is known as the "year of discovery" rule.

Net operating loss can be carried back two years and forward 20 years

Unreimbursed expenses of employees are considered to be deductions from AGI. This means that these expenses can be subtracted from an individual's gross income when calculating their adjusted gross income (AGI). By deducting these expenses, the taxpayer can potentially lower their taxable income and reduce the amount of taxes they owe.

If any employee makes adequate accounting to the employer and the employer reimbursement equals employee expenses, only the reimbursement should be shown on the employee's tax return. The expenses should not be shown because they have already been reimbursed by the employer.

Hobby expenses are generally deductible only to the extent of income produced by the activity. The financial status of the taxpayer is considered in determining whether activities are engaged in for profit. The deduction for the allowed hobby expenses is an itemized deduction subject to the 2 percent floor.

When computing AMTI (Alternative Minimum Taxable Income) for individuals, charitable contributions are allowed. This means that individuals can deduct the amount they have donated to qualified charitable organizations from their AMTI. This deduction helps to reduce their overall tax liability. The other options, such as standard deduction and personal exemptions, are not allowed when computing AMTI.

The term "away from home" according to the IRS means being away from one's usual place of residence for at least one night. This means that in order for travel expenses to be deductible, the taxpayer must spend at least one night away from their home.