QUESTION: 9

On December 1, 1997, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30, 1998. Krest paid the entire interest amount of $24,000 on December 1, 1997. What amount of interest was deductible on Krest's 1997 income tax return?

$0
$2,000
$22,000
$24,000

Answer(s): B

Explanation:

Choice "b" is correct. Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December 1, 1997, only the interest relating to December 1997 can be deducted in 1997. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month.

Choice "a" is incorrect. Because $2,000 of the interest relates to 1997, this amount is deductible in 1997. Choice "c" is incorrect. This is the amount that cannot be deducted until 1998, the year to which the interest relates. Be sure to read questions like this very carefully, because if you had simply misread the question as seeking the amount deductible in 1998, you would get the question wrong despite understanding the rule.

Choice "d" is incorrect. Cash basis taxpayers can deduct interest in the year paid or the year to which the interest relates, whichever is later, thus 11 months of the interest will not be deductible until 1998.

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QUESTION: 10

Which payment(s) is(are) included in a recipient's gross income?

I). Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.
II). A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

I only.
II only.
Both I and II.
Neither I nor II.

Answer(s): C

Explanation:

Choice "c" is correct.

I. A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship.
II. There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university- sponsored research.

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QUESTION: 11

Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions are met?

Option A
Option B
Option C
Option D

Answer(s): D

Explanation:

Choice "d" is correct. Under the uniform capitalization rules, purchasers of inventory for resale may deduct their marketing costs but must capitalize their off-site storage costs.
Choices "a", "b", and "c" are incorrect. Marketing costs are deductible, but off-site storage must be capitalized.

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QUESTION: 12

In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is (are) true?

I). The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year.
II). "Otherwise qualified higher education expenses" must be reduced by qualified scholarships not includible in gross income.

I only.
II only.
Both I and II.
Neither I nor II.

Answer(s): C

Explanation:

Choice "c" is correct. Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).

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QUESTION: 9

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QUESTION: 10

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QUESTION: 11

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QUESTION: 12

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