Chapter 3 Solutions

CHAPTER 3

BUSINESS EXPENSES AND RETIREMENT PLANS

Group 1 - Multiple Choice Questions

1. E (Section 3.1) 12. B (Section 3.4) 23. B (Section 3.7)

2. D (Section 3.1) 13. C (Section 3.5) 24. D (Section 3.8)

3. B (Section 3.2) 14. C (Section 3.5) 25. D (Section 3.8)

4. B (Section 3.2) 15. A (Section 3.6) 26. B (Section 3.8)

5. A (Section 3.2) 16. E (Section 3.6) 27. A (Section 3.9)

6. A (Section 3.2) 17. C (Section 3.6) 28. C (Section 3.9)

7. D (Section 3.2) 18. B (Section 3.6) 29. A (Section 3.9)

8. A (Section 3.2) 19. A (Section 3.6) 30. D (Section 3.10)

9. C (Section 3.2) 20. A (Section 3.6) 31. B (Section 3.10)

10. C (Section 3.3) 21. B (Section 3.6) 32. C (Section 3.10)

11. D (Section 3.4) 22. B (Section 3.7) 33. D (Section 3.10)

Group 2 - Problems

1. Rental income ($750 x 12 months) $9,000

Expenses:

Real estate taxes $1,250

Mortgage interest 1,500

Insurance 375

Repairs 562

Depreciation ($48,000/30 years) 1,600 -5,287

Net rental income $3,713

(Section 3.1)

2. Step 1: Gross income $4,000

Less expenses:

Rental portion of taxes ($950 x 6/12) -475

Rental portion of interest ($3,000 x 6/12) -1,500

Balance to utilities, maintenance and depreciation $2,025

Step 2: Utilities and maintenance ($1,800 x 6/12) -900

Balance to depreciation $1,125

Step 3: Depreciation ($4,500 x 6/12) = $2,250, but limited to $1,125 -1,125

Net income $ 0

(Section 3.1)

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52 Chapter 3 - Business Expenses and Retirement Plans

3. a. $15,000 = $25,000 - (.50 x ($120,000 - 100,000)).

b. $0, no loss is allowed since the amount is a passive loss and the actively managed rental real estate

exception does not apply.

c. The unused losses may be carried forward to future tax years to reduce passive income in those years. Any  loss not previously utilized may be deducted when the taxpayer's interest in the activity is sold. (Section 3.2)

4. See Form 8582 on page 53. (Section...