Answer Key
Question 1
Correct Answer: The specific identification method.
● Explanation: Taxpayers can use the FIFO method to determine basis in the
stock. That is, the first stock purchased is treated as though it is the first stock
sold. Taxpayers can also use the specific identification method of determining
the basis of the stock sold. [Source: Spilker_TIBE_2024Release_CH07_SM.docx,
p. 11]
●
Question 2
Correct Answer: Interest income from corporate bonds.
● Explanation: Long-term capital gains and dividends that qualify for the
preferential tax rate are not considered to be investment income for purposes of
determining the investment interest expense deduction unless the taxpayer
makes an election to tax this income at ordinary rates. [Source:
Spilker_TIBE_2024Release_CH07_SM.docx, p. 13]
●
Question 3
Correct Answer: Tax-basis, at-risk, passive activity loss rules.
● Explanation: To deduct a loss, the investment must pass three hurdles in the
following order: the tax-basis limitation, the at-risk limitation, and the passive
activity loss limitation. This sequence is demonstrated in problems like Chapter 7,
Problem #58.
●
Question 4
Correct Answer: $0
● Explanation: If a taxpayer holds qualified small business stock for more than five
years, 100 percent of the gain is excluded from income. Since the taxpayer held
the stock for ten years, the entire gain is excluded, and no tax is owed. [Source:
Spilker_TIBE_2024Release_CH07_SM.docx, p. 12]
●
Question 5
Correct Answer: $7,000 STCG and $9,000 LTCG
● Explanation: The net short-term capital gain is $7,000 ($9,000 - $2,000). The
net long-term capital gain is $9,000 ($15,000 - $6,000). [Source:
Spilker_TIBE_2024Release_CH07_SM.docx, p. 16]
●
Question 6
Correct Answer: AGI is increased by $7,000.
● Explanation: The net short-term capital loss is netted against the net long-term
capital gain. The resulting net capital gain is $7,000 ($12,000 LTCG - $5,000
STCL). This amount is added to ordinary income to determine AGI.
●
Question 7
Correct Answer: The individual participates for 120 hours during the year, and
their participation is not less than any other individual’s participation.
● Explanation: The test described in the correct answer is incorrect. To meet the
"more than 100 hours" test, the individual's participation must not be less than
any other individual's participation. 120 hours meets the time threshold, but the
second part of the test requires comparison to others. The correct test is
participating more than 100 hours AND not less than any other individual. A
simple 120 hours does not automatically qualify. [Source:
Spilker_TIBE_2024Release_CH07_SM.docx, p. 14]
●
Question 8
Correct Answer: $0 deductible loss in year 4; $10,000 basis in new stock.
● Explanation: This is a wash sale. The realized loss of $4,000 is disallowed. The
disallowed loss is added to the basis of the newly purchased shares. Thus, the
basis of the 100 new shares is $10,000 ($6,000 purchase price + $4,000
disallowed loss). [Source: Spilker_TIBE_2024Release_CH07_SM.docx, p. 21]
●
Question 9
Correct Answer: $10,750 gain
● Explanation: John’s adjusted basis is $30,750 ($30,000 purchase price + $750
commission). The amount realized is $41,500 ($42,500 sales price - $1,000 fee).
The gain is $10,750 ($41,500 - $30,750). [Source:
Spilker_TIBE_2024Release_CH07_SM.docx, p. 15]
●
Question 10
Correct Answer: $2,500
● Explanation: The deduction for investment interest expense is limited to the
extent of net investment income. Here, net investment income is $2,500.
Therefore, only $2,500 of the investment interest expense is deductible, and the
remaining $500 is carried forward. [Source:
Spilker_TIBE_2024Release_CH07_SM.docx, p. 23]
●
Question 11
Correct Answer: $2,000 is disallowed by the tax-basis rules, and an additional
$5,000 is disallowed by the at-risk rules.
● Explanation: The $22,000 loss is first limited to Rubio's tax basis of $20,000, so
$2,000 is disallowed. The remaining $20,000 loss is then limited to his at-risk
amount of $15,000, so an additional $5,000 is disallowed. [Source:
Spilker_TIBE_2024Release_CH07_SM.docx, p. 24]
●
Question 12
Correct Answer: Marriage benefit
● Explanation: A marriage benefit generally applies to couples with one primary
breadwinner or significantly disparate incomes, because the wider tax brackets
for married filing jointly allow more of the primary earner's income to be taxed at
lower rates than if they had filed as single. [Source:
Spilker_TIBE_2024Release_CH08_SM (1).docx, Problem #49]
●
Question 13
Correct Answer: Both spouses have very high, and roughly equal, salaries.
● Explanation: The marriage penalty applies to couples with two wage earners
with high incomes. This happens because their combined income, when taxed
under the married filing jointly brackets, can push them into a higher tax bracket
faster than if their incomes were taxed separately under the single filing status
brackets. [Source: Spilker_TIBE_2024Release_CH08_SM (1).docx, Discussion
Question #3]
●
Question 14
Correct Answer: A 16-year-old with $3,500 of unearned income.
● Explanation: The kiddie tax applies to children under age 18 at year-end who
have unearned income in excess of $2,600 (for 2024). The 16-year-old with
$3,500 of unearned income meets these criteria. The other options fail based on
age, the amount of unearned income, or the earned income exception for
children 18 or older. [Source: Spilker_TIBE_2024Release_CH08_SM (1).docx,
Discussion Question #10]
●
Question 15
Correct Answer: The AMT base is a broader, more inclusive tax base than the
regular income tax base.
● Explanation: The AMT system is different in that it taxes a more broad or
inclusive tax base than the regular income tax. It is designed to tax an income
●
base that more closely reflects economic income by disallowing or limiting
certain deductions and exclusions available under the regular tax system.
[Source: Spilker_TIBE_2024Release_CH08_SM (1).docx, Discussion Question #12]
Question 16
Correct Answer: To create parity between employees and self-employed
individuals, since employers can deduct their share of FICA taxes.
● Explanation: Unlike independent contractors, employees share their FICA tax
burden with employers. Contractors are allowed to deduct the employer portion
of the self-employment (FICA) taxes they pay. This helps reduce the tax sting a
little and creates parity, as the employer's portion is a deductible business
expense for the employer. [Source: Spilker_TIBE_2024Release_CH08_SM
(1).docx, Discussion Question #25]
●
Question 17
Correct Answer: A $100 tax credit is generally more valuable than a $100 tax
deduction.
● Explanation: A tax credit and a tax deduction both reduce a taxpayer’s taxes
payable. However, a credit is more valuable than a deduction. Though a
deduction reduces taxable income, a tax credit reduces the taxes payable dollarfor-dollar. [Source: Spilker_TIBE_2024Release_CH08_SM (1).docx, Discussion
Question #27]
●
Question 18
Correct Answer: 33%
● Explanation: Accepting the offer increases AGI from $195,000 to $240,000.
This pushes the taxpayer into a higher tax bracket (32%) and causes a phase-out
of the child tax credit, as AGI now exceeds the $200,000 threshold for head of
household. The combination of the higher tax bracket and the credit reduction
results in an effective marginal tax rate of approximately 33.09% on the
additional income. [Source: Spilker_TIBE_2024Release_CH08_SM (1).docx,
Comprehensive Problem #83]
●
Question 19
Correct Answer: $5,884
● Explanation: Lacy's ordinary income is $46,000 ($51,000 - $5,000). The tax on
this is $5,288. For the qualified dividends, the first $1,025 is taxed at 0% (as it
falls within the 0% preferential rate bracket), and the remaining $3,975 is taxed at
●
15%. Total tax is $5,288 + (3,975 * 15%) = $5,884.25. [Source:
Spilker_TIBE_2024Release_CH08_SM (1).docx, Problem #50]
Question 20
Correct Answer: The $70,000 is taxed using the head of household schedule
first, and then the tax on the $10,000 capital gain is calculated using the
preferential rates based on where it falls in the income brackets.
● Explanation: Taxpayers compute the tax on the ordinary income portion by
applying the appropriate tax rate schedule. For dividends and capital gains taxed
at preferential tax rates, the preferential tax rate is determined by the taxpayer’s
filing status and income as determined by tax brackets specific for preferential
income. [Source: Spilker_TIBE_2024Release_CH08_SM (1).docx, Discussion
Question #4]
●
Question 21
Correct Answer: $1,670
● Explanation: Sheryl is subject to the kiddie tax. Her taxable income is $5,700
($7,000 gross income - $1,300 standard deduction). Her net unearned income is
$4,400 ($7,000 - $2,600). This portion is taxed at her parents' marginal rate of
35%, resulting in a tax of $1,540. The remaining $1,300 of her taxable income is
taxed at her own rate of 10%, for a tax of $130. Her total tax is $1,670. [Source:
Spilker_TIBE_2024Release_CH08_SM (1).docx, Problem #51]
●
Question 22
Correct Answer: $16,878
● Explanation: Rasheed pays Social Security tax of 6.2% on the first $168,600 of
salary ($10,453). He pays Medicare tax of 1.45% on his entire salary ($5,075). He
also pays the additional Medicare tax of 0.9% on salary in excess of $200,000,
which is $1,350 (0.9% * $150,000). Total FICA is $10,453 + $5,075 + $1,350 =
$16,878. [Source: Spilker_TIBE_2024Release_CH08_SM (1).docx, Problem #65]
●
Question 23
Correct Answer: $400
● Explanation: Julie's qualifying expenditures are $2,000 (the lesser of the
amount paid, the $3,000 limit for one child, and her earned income). Because her
AGI is over $43,000, her credit percentage is 20%. The credit is $400 ($2,000 *
20%). [Source: Spilker_TIBE_2024Release_CH08_SM (1).docx, Problem #71]
●
Question 24
Correct Answer: $2,900 tax refund
● Explanation: The $2,400 nonrefundable credit reduces his $1,800 tax liability to
zero. The remaining $600 of this credit is lost. The $1,500 business credit is
carried over. The $600 refundable credit and the $2,300 withholding are
refunded. Total refund is $2,900. [Source: Spilker_TIBE_2024Release_CH08_SM
(1).docx, Problem #76]
●
Question 25
Correct Answer: The business owner pays a salary to his nephew that is
significantly higher than the market rate for the same services.
● Explanation: Reasonableness is most likely to be an issue when a payment is
made to a related individual or the taxpayer enjoys some personal benefit
incidental to the expenditure. A common test for reasonableness is whether the
expenditure is comparable to an arm's length amount. [Source:
Spilker_TIBE_2024Release_CH09_SM.docx, Discussion Question #3 & #4]
●
Question 26
Correct Answer: $2,000 for meals with employees at a project site, with costs
properly substantiated.
● Explanation: Fines and penalties are not deductible. Lobbying expenses are
generally not deductible. Entertainment expenses are not deductible. Premiums
on key employee life insurance are not deductible if the business is the
beneficiary. However, meals for employees can be deductible (subject to the
50% limitation). [Source: Spilker_TIBE_2024Release_CH09_SM.docx,
Comprehensive Problem #80]
●
Question 27
Correct Answer: If a trip is primarily for business, the full cost of transportation
(e.g., airfare) to and from the destination is generally deductible for domestic
travel.
● Explanation: If the taxpayer has both business and personal motives for a trip,
but the primary or dominant motive is business, the taxpayer may deduct the
transportation costs to get to the place of business. Meals are generally limited
to a 50% deduction. [Source: Spilker_TIBE_2024Release_CH09_SM.docx,
Discussion Question #11]
●
Question 28
●
Correct Answer: June 15.
●
Explanation: A business might use a calendar year (ends on December 31), a
fiscal year (ends on the last day of a month other than December) or a 52/53
week fiscal year end (ends on the same day of the week every year). A year-end
of June 15 is not the last day of a month and would not be a valid fiscal year-end.
[Source: Spilker_TIBE_2024Release_CH09_SM.docx, Discussion Question #19]
Question 29
Correct Answer: Receiving a payment in December for services to be performed
in January of the next year, where the business properly elects the one-year
deferral method.
● Explanation: Businesses receiving advance payments for services may elect to
defer recognizing the prepayment as income until the tax year following receipt
of the payment. Prepayments for rent, however, are generally taxed upon receipt.
[Source: Spilker_TIBE_2024Release_CH09_SM.docx, Discussion Question #30]
●
Question 30
Correct Answer: Costs of selling, advertising, and research.
● Explanation: The costs of selling, advertising, and research are period costs and
are not required to be allocated to inventory under UNICAP. In contrast, direct
costs like materials and labor, as well as indirect costs that support production
like factory overhead, must be capitalized. [Source:
Spilker_TIBE_2024Release_CH09_SM.docx, Problem #65]
●
Question 31
Correct Answer: By using and reporting the results of the method for at least
one year.
● Explanation: A business adopts a permissible accounting method by using and
reporting the results of the method for at least one year. [Source:
Spilker_TIBE_2024Release_CH09_SM.docx, Discussion Question #41]
●
Question 32
Correct Answer: A business adopts an impermissible method by using and
reporting the results of the method for two consecutive years.
● Explanation: A business adopts an impermissible method by using and reporting
the results of the method for two consecutive years. [Source:
Spilker_TIBE_2024Release_CH09_SM.docx, Discussion Question #41]
●
Question 33
●
Correct Answer: $850
●
Explanation: §274(a) denies deductions for amounts paid or incurred for
entertainment, including membership in any club organized for business or social
purposes. Hence, the country club dues are nondeductible. However, 50% of the
cost of the business meals ($850) could be deductible if they meet the necessary
criteria. [Source: Spilker_TIBE_2024Release_CH09_SM.docx, Problem #53]
Question 34
Correct Answer: $5.82 million
● Explanation: The deduction for business interest expense is limited to the sum of
business interest income plus 30 percent of the business's adjusted taxable
income. Adjusted taxable income is calculated before interest and depreciation.
Here, it is $19.4 million. The limit is $5.82 million ($19.4M * 30%). [Source:
Spilker_TIBE_2024Release_CH09_SM.docx, Problem #56]
●
Question 35
Correct Answer: $5,000
● Explanation: For a business asset that is completely destroyed, the amount of
the loss is calculated as the asset's adjusted basis minus the insurance proceeds.
The deductible loss is $5,000 ($15,000 adjusted basis - $10,000 insurance). This
is based on the logic in Chapter 9, Problem #57.
●
Question 36
Correct Answer: $3,500
● Explanation: A cash-method taxpayer recognizes income when it is received,
regardless of the form. This includes the $2,000 cash, the $500 value of the
tickets, and the $1,000 check (under the doctrine of constructive receipt). The
$800 billed but not received is not included. Total income is $3,500. This is based
on the principles in Chapter 9, Problem #60.
●