Rental Property
Which of the following payments is NOT considered rent to be included in gross income?
Rental income includes advance rent, expenses paid by tenant, property or services in lieu of rent and non-refundable security deposits. Deposits earmarked for return to tenant upon lease termination (a refundable security deposit) are not included in rental income.
An organization may qualify under Section 501(c)(3) if it is organized exclusively for which of the following purposes?
An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes:
Which of the following statements regarding grantor trusts is true?
Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. A grantor is the person who creates and usually contributes property to the trust. Also called a trustor or settlor. A grantor trust is a trust in which the grantor retains control and has an interest as beneficiary. Income from a grantor trust is taxable to the grantor as if no trust existed. This rule also applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor's spouse.
Farmer Judy is a calendar-year taxpayer who uses the cash method of accounting. She normally sells 200 head of sheep a year. Because of a drought, she sold 250 head of sheep in 20X1. Farmer Judy realized $50,000 from the sale. The affected area was declared a disaster area eligible for federal assistance on March 12, 20X1. How much, if any, income can Farmer Judy postpone to 20X2?
If you sell or exchange more livestock (including sheep) than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. Judy sold 50 more head of sheep than normal so she may defer $10,000 (50 ÷ 250 × $50,000).
All of the following returns would include income in respect of a decedent EXCEPT:
All income the decedent would have received had death not occurred that was not properly includible on the final return is income in respect of a decedent (IRD). Income in respect of a decedent is included in the income of one of the following:
The character of the IRD is the same as it would be to the decedent if he were alive. If the income would have been a capital gain to the decedent, it will be a capital gain to the taxpayer.
Kathy rented out her summer home for 80 days plus used it personally for 20 days. She paid $1,000 for repairs and $2,000 for utilities. Rental income was $8,000. What was Kathy's net rental income?
Because Kathy uses the property more than 10% of the time, she must allocate expenses between rental and personal use. If 80% of the use is rented out at fair market rental rates, she can deduct 80% of the expenses from her rental income. Total expense of $3,000 × 80% = $2,400. Gross rental income of $8,000 – $2,400 of allowable expenses = $5,600 net rental income.
Which return might a tax-exempt organization be required to file?
A tax-exempt organization may be required to file annual Information returns, employment tax returns, and a report of cash received.
The trustee of a grantor type trust must never:
A grantor trust is a trust in which the grantor retains control and has an interest as beneficiary. Income from a grantor trust is taxed to the grantor as if no trust existed. Therefore, the trustee of a grantor trust would not file a trust return, figuring the tax on all income and deductions of the trust.
For purposes of estimated tax exceptions for farmers, all of the following are considered gross income from farming EXCEPT:
Income from farming includes amounts received from cultivating, operating, or managing a farm for gain or profit, as either owner or tenant. This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. Gross income from farming is the total of the following amounts from the tax return:
Gross income from farming does not include, wages as a farm employee, income from contract grain harvesting and hauling with workers and machines furnished by taxpayer, gains from the sale of farmland, and depreciable farm equipment.
Which of the following items is NOT an allowable deduction on a decedent's estate tax return?
A bequest is an act of giving or leaving property to another after death through the decedent's last will and testament. Generally, any distribution of income (or property in kind) to a beneficiary is an allowable deduction to the estate and is includible in the beneficiary's gross income to the extent of the estate's distributable net income. However, a distribution will not be an allowable deduction to the estate and will not be includible in the beneficiary's gross income if the distribution meets all the following requirements.
During the current year, Bob rented out his condominium for 10 days when the local NASCAR races were in town. Bob used the condo himself for a total of 75 days during the year. Revenue for the 10 rental days was $2,500. Expenses for the condo for the year were $6,000 in property taxes and $600 for utilities. What amount of the rental income is includable in Bob's taxable income?
Since the property was rented out for less than 15 days, no rental income is includable and expenses attributable to the rental are not deductible. The property taxes are still deductible in full on Schedule A.
Which of the following organizations is not required to file an annual information return such as Form 990 or 990-EZ, Return of Organization Exempt From Income Tax?
Organizations exempt from federal income tax under section 501(a) must file an annual information return Form 990 or 990-EZ. Notable exceptions include:
All of the following statements about trusts are true EXCEPT:
A trust may not deduct distributions in excess of DNI.
Betsy is a dairy cow raised on Ronald's Dairy Farm. Ronald sold Betsy for $3,800. He incurred $300 in transportation expenses that were included in the sales price. Ronald estimates that Betsy cost $2,000 for food and other expenses to raise her. He deducted these expenses. What is Ronald's gain from the sale of Betsy?
Gain on the sale of raised livestock is generally the gross sales prices reduced by any expenses of the sale. Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expense. The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised.
Betsy has zero basis because the cost of raising her was already deducted. Ronald's gain is therefore $3,500 ($3,800 received – $300 expenses).
A paycheck issued after the date of death to a taxpayer for work performed prior to death is considered?
All income the decedent would have received had death not occurred that was not properly includible on the final return is income in respect of a decedent (IRD).
Jose started renting a house to Bill for $600 per month beginning February 1, 20X1. Bill paid $1,200 on January 15, 20X1, which included the first month's rent and one month's security deposit. The rent is due by the 5th of the month. The lease specifies that the security deposit would also be used as the final month's rent. Bill pays the rent on the 2nd of each month. In July, Bill also paid $150 for repairs to the air conditioning system and in September he paid $80 for a roof repair. He deducted the amounts from the rent paid to Jose for those months. Bill was unable to pay December's rent until January of the next year. How much should Jose report as rental income for 20X1?
If the tenant will use their security deposit as a final payment of rent, it is advance rent. The property owner should include it as income when received. Rental income includes expenses of the property owner paid by the tenant. Jose received 2 months worth of rent on Jan 15 (first and last month), and 9 more months through Nov 2, for a total of 11 payments. 11 months × $600 per month = $6,600 received in 20X1. Rent is reported as rental income in the year received.
A small university which operates as a private not-for-profit organization has received tax exempt status from the Internal Revenue Service. Thus, the charity gets to use a nonprofit postal permit for its mailings which reduces its costs significantly. In addition, except for unrelated business income, the charity pays no federal income taxes. Gifts made to the organization are tax deductible by the donor. What is the label that is attached to this tax exempt status?
Not-for-profit organizations that are charitable, educational, or scientific typically operate as Section 501 (c) (3) tax-exempt organizations and receive the benefits mentioned. Organizations created under acts of Congress (such as Federal Credit Unions) are identified as Section 501 (c) (1) organizations. Political advocacy groups can qualify as Section 501 (c) (4) organizations although donations are not tax deductible for the donor. Business leagues, chambers of commerce, and the like are Section 501 (c) (6). Section 501 (c) (3) is the most widely mentioned of these tax-exempt classifications because of the number of organizations that qualify and because of the significant benefits.
The Morrison Trust requires that all trust income be distributed at least annually. There are no provisions for charitable contributions. To be treated as a simple trust, what must also be true?
A trust may qualify as a simple trust if:
osh is a cattle farmer who uses the cash method of accounting. He files his returns on a calendar year basis. Normally, he sells 100 head of beef cattle a year; however, as a result of drought he had to sell 135 head during 20X1. He realized $35,100 from the sale. On August 9, 20X1, due to the drought, Josh's area was declared eligible for federal assistance. How much of the income from the sale of the cattle can Josh defer until 20X2?
If you sell or exchange more livestock (including poultry) than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. Josh sold 35 more cattle than normal so he may defer $9,100 (35 ÷ 135 × $35,100).
On December 15, 20X1, Kyle received a $10,000 distribution from his father's estate. On March 30, 20X2, Kyle was issued Schedule K-1 for the estate's first fiscal year (February 1, 20X1 through January 31, 20X2). The Schedule K-1 from the estate showed taxable interest income of $200 and had no other entries. Based on the information above, which of the following statements are true?
An estate is a separate legal entity for tax purposes. Schedule K-1, Form 1041 includes the beneficiary's share of income, deductions, and credits from the estate. A beneficiary is responsible for taxes on distributions from an estate up to the amount of the distributable net income (DNI).
Since the $10,000 distribution occurred during the estates fiscal year and the only income reported to Kyle is $200 interest, the remainder of the $10,000 distribution is from principal. A calendar year taxpayer reports K-1 income on the tax return for the year the estates fiscal year ends.
Kyle does not have income in respect of a decedent. The estate received the interest, and distributed interest and principal.
If you have to include income in respect of a decedent in your gross income and an estate tax return (Form 706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income.
Ms. Cross owns a house that she rents to non-related parties. She incurred the following costs during the year:
She does not make the election to use the safe harbor for any of these costs. How should these costs be characterized and in what amounts?
Improvements add to the value of the property, increase its useful life, or adapt it to a new use. Replacing cabinets, a stove, or a dishwasher increase the value of the property, and therefore must be capitalized. Painting is typically a repair, but if the taxpayer makes repairs as part of an extensive remodeling or restoration of the property, the whole job is considered an improvement. Resurfacing the tub is a repair and is taken as an expense in the year incurred.
Select the organization that could not receive approval for tax-exempt status under Section 501(c)(3).
Qualifying Section 501(c)(3) organizations include:
If a trust has adjusted total income of $10,000, distributable net income of $11,000, and $12,000 is required to be currently distributed, what is its income distribution deduction?
To determine the maximum amount of income distributions for which a deduction is allowed, Trusts and Estates must calculate Distributable Net Income (DNI) each year. A trust may not deduct distributions in excess of DNI.
Leonard Brown operated a cattle and grain farm in 20X1. Leonard sold $42,000 of grain and $23,000 of cattle held for breeding purposes. Leonard also received patronage dividends from the local feed store of $432, feed assistance payments of $1,200, and $1,500 for haying a neighbor's meadow. Leonard should report the following on Schedule F of his federal income tax return for 20X1:
Farmers use Schedule F (Form 1040) to figure the net profit or loss from regular farming operations. Income from farming reported on Schedule F includes amounts from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. This includes income from operating stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. It also includes income from the sale of crop shares if you materially participate in producing the crop.
$42,000Grain Sales
$1,200Feed assistance payments
$1,500For haying meadow
$432Patronage dividends from the local feed store
$45,132Farm income on Schedule F (Form 1040)
Sales of livestock used in the business (not held for resale), for draft, breeding, sport, or dairy purposes result in ordinary or capital gains or losses, depending on the circumstances. In general, this is reported on Form 4797.
Mark died on December 22, 20X1. The executor of his estate chose a calendar year. In 20X2, the estate had a tax liability of $2,000. It is expected that the estate will have an adjusted gross income of $43,000 and a tax liability of $3,000 in 20X3. All of the income is from interest and dividends from which no tax was withheld. Which of the following statements regarding estimated tax payments for this estate are true?
Estates with tax years ending two or more years after the date of the decedent's death must pay estimated tax in the same manner as individuals. Generally, you must pay estimated tax if the estate is expected to owe, after subtracting any withholding and credits, at least $1,000 in tax for the tax year. Estates are not subject to the penalty for underpayment of tax if the estimated payments, withholdings, and credits total at least:
The general rule is that you must make your first estimated tax payment by April 15. You can either pay all of your estimated tax at that time or pay it in four equal amounts that are due by April 15, June 15, September 15, and January 15 the following year.