CPA Regulation (REG) : Individual Income Tax - Sources of Taxable Income
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Example Questions
Example Question #11 : Individual Income Tax Sources Of Taxable Income
ABC Inc is an S corporation that pays single coverage health insurance premiums of $4,8000 per year and family coverage premiums of $7,200 per year. A is a 10% shareholder in the S corp. On A’s behalf, ABC pays A’s family coverage under the health insurance plan. What amount of insurance premiums is includable in A’s gross income?
$4,800
$7,200
$0
$720
$7,200
Fringe benefits paid by an S corp are deductible by the S corp only for non-shareholder employees and those employee-shareholders owning 2% or less of the S corp.
Example Question #12 : Individual Income Tax Sources Of Taxable Income
In a complete liquidation of a partnership, a partner would recognize a gain:
Only if that partner had a majority interest
No matter what
Only to the extent that money received exceeds the partner’s adjusted basis
Only if that partner had been a partner since formation
Only to the extent that money received exceeds the partner’s adjusted basis
The partner would likely not recognize a gain or loss in complete liquidation unless the money received exceeds the partner’s basis.
Example Question #1 : Taxable Income Items
On January 1, Smith sold land to Baker for $100,000 cash plus a note for $200,000 plus adequate interest with a $30,000 principal payment due in the second year. Smith's basis in the property was $100,000. What is the amount of the gain recognized in the second year under the installment method?
$30,000
$200,000
$100,000
$20,000
$20,000
Smith’s basis in the land was $100,000, and he sold the land for $300,000 (cash plus the note). As a result, under the installment method, 2/3 of all cash received is treated as a gain (with the other 1/3 a return of Smith’s original basis in the land). With the receipt of $30,000 in the second year, 2/3 (=$20,000) is treated as a gain.
Example Question #2 : Taxable Income Items
Which of the following is taxable as gross income?
Child support received based on a divorce agreement executed in 2015.
Alimony received based on a divorce agreement executed in 2015.
Child support received based on a divorce agreement executed in 2019.
Alimony received based on a divorce agreement executed in 2019.
Alimony received based on a divorce agreement executed in 2015.
For a divorce finalized on or before Dec. 31, 2018, alimony received is included in gross income. For divorces finalized after this date, alimony is not included in gross income. Child support is never included in gross income.
Example Question #3 : Taxable Income Items
Dot, an employee of Acme C Corporation, is not a shareholder. Which of the following would be included in a taxpayer’s gross income?
The fair market value of a vehicle that the taxpayer inherited from an uncle.
The dividend income on shares of stock that the taxpayer received for services rendered.
A $9,000 gift from the taxpayer’s grandparents.
Employer-provided medical insurance coverage under a health plan.
The dividend income on shares of stock that the taxpayer received for services rendered.
Gifts, inheritance, and medical insurance are not included in gross income. Dividend income is the only item that is regularly included in gross income.
Example Question #4 : Taxable Income Items
Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods created by the taxpayer?
Taxes excluding income taxes
Quality control
Research
Warehousing costs
Research
Uniform Capitalization rules provide guidelines with respect to capitalizing or expensing certain costs. With regard to inventory, direct materials, direct labor, and factory overhead should be capitalized as part of the cost of inventory.
Example Question #5 : Taxable Income Items
Which of the following costs are subject to the Uniform Capitalization Rules of Code Sec 263A for manufactured tangible personal property?
Advertising
Marketing
Off-site storage
Research
Off-site storage
Costs required to be capitalized under the uniform capitalization rules include direct materials, direct labor, and applicable indirect costs. Applicable indirect costs include utilities, warehousing costs, repairs, maintenance, indirect labor, rents, storage, depreciation, and others.
Example Question #4 : Taxable Income Items
If a partnership’s business and financial operations are discontinued, would it be considered terminated for income tax purposes?
Yes
If 60% of the total interest is sold within 12 months
More information needed
No
Yes
A partnership is considered terminated under a few circumstances, one being if the operations of it are ceased.
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