1. Look at the Form 1040 you prepared for Jim Samuels. What is the amount on Form 1040, Line 37?

a. $ 23,140.
b. $ 20,519.
c. $ 19,069. 
d. $ 18,949.

2. Look at the Form 1040 you prepared for Jim Samuels. What is the amount on Form 1040, Line 74a?

a. $ 946.
b. $ 923.
c. $ 706. 
d. $ 316.

Please use IRS Publication 946 to answer the following questions.

3. Depreciation is an annual income tax deduction that allows you to

a. recover the cost or other basis of certain property over the time you use the property.
b. get a special tax credit for performing acts of kindness.
c. a special tax cut on your tax return.
d. receive a credit only if you own luxury property.

4. Property that can be depreciated is property for which you can recover the cost over a period of time due to

a. normal wear and tear of property.
b. deterioration of property.
c. obsolete property.
d. all of the above.

5. You can depreciate most types of tangible and intangible property. This property usually has a useful life and is used up. The following property is not allowed to be depreciated.

a. a building
b. machinery
c. patents
d. land

6. To take a deduction for depreciation, the property that you depreciate must be used in your business or income-producing activity. Which of the following is correct regarding your property?

a. The property must have a determinable useful life.
b. The property must be expected to last more than one year.
c. The property must be used in your business or income producing activity.
d. all of the above

7. You can only depreciate a property that you can retain ownership in. This means you have

a. the legal title.
b. the legal obligation to pay for it.
c. the duty to pay any taxes on the property.
d. all of the above

8. To claim depreciation on property, you must use it in your business or income-producing activity. The income that is produced from your property

a. can be either for profit or non-profit.
b. must be taxable income.
c. can be non-taxable income.
d.  all of the above

9. Normally, containers for the products you sell are part of inventory and you normally can not depreciate them. However, you can depreciate containers used to ship your products if

a. they have a useful life longer than one year.
b. they qualify as property used in your business.
c. title to the containers does not pass to the buyer.
d.  all of the above.

10. Even if all the requirements are met to depreciate a property, you can not depreciate

a. a computer that you expect to use for the next 2 years.
b. equipment in the normal operation of your business.
c. property placed in service and disposed of in the same year.
d. a horse used in a ranch for herding cattle because animals cannot be depreciated.

11. A building contractor who specializes in constructing office buildings bought a truck last year that had to be modified to lift materials to second-story levels. The installation of the lifting equipment was completed and the building contractor accepted delivery of the modified truck on January 25 of the 2007 tax year. The truck is considered to be placed in service

a. when it was first acquired by the building contractor.
b. on the date it was ready and available to perform the function for which it was purchased.
c. never. Since he didn't place it in service when he acquired it and therefore he is not able to depreciate the property.
d. never because he should have bought a truck ready to be used for its intended purpose as there is no need to modify an equipment when there is equipment already with the features needed for immediate use.

12. If you held property for personal use and later used it in your business or income-producing activity, your depreciable basis is the lesser of the fair market value (FMV) of the property on the date of the change in use or

a. your original cost or other basis adjusted by the increase in the cost of any permanent improvements or additions and other costs that must be added to basis.
b. your original cost or other basis adjusted by the decrease in any deductions you claim for casualty and theft losses and other items that reduced your basis. 
c. both a and b are correct.
d. none of the above.

13. If you improve your depreciable property, you must

a. start over and since the property has a new useful life you must list it again.
b. treat the improvement as a separate depreciable property.
c. must continue to depreciate the improved property as if the improvement didn't take place and not take into account the improvement until the property is retired or disposed of.
d. must stop depreciating the improved property because depreciating improved property is not allowed at anytime.

14. You adopt a method of accounting for depreciation for the rest of the property's depreciable life by

a. using a permissible method of determining depreciation when you file your first tax return.
b. using the same impermissible method of determining depreciation in two or more consecutive filed tax returns.
c. properly documenting your decision and keeping it in writing for at least 4 years.
d. Either a or b are correct.

15. By electing this method of depreciation you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. What is the method?

a. section 179 deduction
b. section 1250 deduction
c. section 1245 deduction
d. straight line method.

16. If you do not claim the depreciation you are entitled to deduct

a. you cannot change your accounting method to claim the correct amount of depreciation.
b. you must reduce the basis of the property by the full amount of depreciation you were entitled to deduct.
c. you must reduce your basis by any amount deducted from which you received a tax benefit.
d. you can file an amended return to claim the depreciation you are entitled to deduct.

Please use IRS Publication 535 to answer the following questions.

17. When you start a business, treat all eligible costs you incur before you begin operating the business as capital which are part of the basis of the business. Generally,

a. You recover the costs for particular assets through depreciation deductions.
b. You cannot recover other costs until you sell the business.
c. You cannot recover other costs until you go out of business.
d. All of the above.

18 . These are the costs of carrying on a trade or business and they are usually deductible if the business is operated to make a profit.

a. Business assets.
b. Improvements.
c. Business expenses.
d. all of the above.

19. If you use part of your home for business (office in the home), you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. To qualify to claim expenses for the business use of your home,

a. The business part of your home must be used exclusively and regularly for the trade or business.
b. The business part of your home must be your principal place of business or a place where you meet with or deal with patients, clients, or customers in the normal course of your trade or business.
c. The business part of your home must be a separate structure (not attached to your home) used in connection with your trade or business.
d. all of the above.

20. To be deductible, a business expense is helpful and appropriate for your business. It is an expense that is common and accepted in your field of business and it does not have to be indispensable to be considered necessary. To be deductible the business expense must be

a. ordinary and necessary.
b. an indispensable expense.
c. an expense that is absolutely necessary.
d. an expense that is private and personal.

21. When you can deduct an expense depends on your accounting method. An accounting method is a set of rules used to determine when and how income and expenses are reported. The method you use must clearly reflect income. The two basic methods are 

a. The ordinary method and the necessary method.
b. The cash method and the accrual method.
c. The expense method and the absolute method.
d. The business method and the personal method.

22. You generally can deduct premiums you pay for insurance related to your trade or business. One kind of insurance is group hospitalization and medical insurance for employees, including long-term care insurance. You can deduct as business expenses life insurance covering your officers and employees if

a. You pay for the plan for the whole tax year.
b. You are not directly or indirectly a beneficiary under the contract.
c. You also are a beneficiary under the contract.
d. If the life insurance also covers your car.

23. Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. These costs

a. should be included in the basis of property you produce or acquire for resale.
b. should be claimed as a current deduction.
c. are produced for your use and are not business costs.
d. Both a and b are correct.

24. You are able to deduct the following expense as cost of goods sold from your gross receipts on Schedule C.

a. Factory rent.
b. Storage and direct labor of producing products.
c. Costs of products or raw materials, including freight.
d. All of the above.

25. This debt is a loss from the worthlessness of a debt that was either created or acquired in your trade or business, or was closely related to your trade or business when it became partly or totally worthless.

a. A non-business bad debt.
b. A business bad debt.
c. A personally motivated bad debt.
d. A credit bad debt.

26. An accountable plan, requires your employees to meet the following requirement.

a. Employee must have paid or incurred deductible expenses while performing services as your employee.
b. Employee must have adequately account to boss for deductible expenses within a reasonable period of time.
c. Employee must return any excess reimbursement or allowance within a reasonable period of time.
d. All of the above.

27. You employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. For 2007, the standard mileage rate for each business mile is

a. 40.5 cents per mile between January 1 and August 31.
b. 48.5 cents per mile for all business miles.
c. 48.5 cents per mile between September 1 and December 31.
d. 44.5 cents per mile all year.

28. To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Generally, you also show that they are

a. Directly related to or associated with the conduct of your trade or business.
b. Indispensable to your business.
c. The most inexpensive expense possible.
d. None of the above.

29. You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in taxes from your own funds. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as

a. Expenses for going into business.
b. Factory rent.
c. Employment taxes.
d. all of the above.

30.  As an employer you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. Deduct these payments as

a. Employee fringe benefits.
b. Taxes paid.
c. Organization costs.
d. all of the above.

31. Look at the Form 540 you prepared for Jim Samuels. What is the amount on Form 540, Line 19?

a. $ 15,553.
b. $ 19,624.
c. $ 17,003. 
d. $ 15,433.

32. Look at the Form 540 you prepared for Jim Samuels. What is the amount on Form 540, Line 66?

a. $ 672.
b. $ 776.
c. $ 890. 
d. $ 830.

33. If you are an employer and have established or contributed to a qualified employee child care program, constructed a child care facility in California, or contributed to California child care information and referral services, you can

a. Claim the Employer Child Care Program Credit.
b. File form FTB 3501 to claim credit.
c. Claim 50% of costs you paid or incurred for establishing a child care program.
d. Both a and b are correct.

34. If you are an employer who made contributions to a qualified care plan for any of your California employee's dependents under the age of 12, or self-employed individual who made contributions to a qualified care plan for their dependents under the age of 12. The amount of the credit allowed is

a. 40% of costs you paid.
b. 20% of costs you paid.
c. 50% of costs you paid.
d. 30% of costs you paid.

35. If a nonresident owns a business, trade, or profession carried on within California that is an integral part of a unitary business carried on both within and outside of California, gross income from the entire business, trade, or profession is included in the nonresident's adjusted gross income from all sources.

True False

36. If Property was placed in service on or after 5/13/1993, and before 01/10/1997, to figure the depreciation adjustment to make on Schedule CA (540 or 540NR) use

a. FTB 3801.
b. FTB 3885B.
c. FTB 3885A. 
d. FTB 3805V.

37. Federal law allows an additional 30% first-year depreciation deduction and AMT depreciation adjustment for property placed in service after 9/19/2001. For assets placed in service on or after 9/11/2001 and before 01/01/2005, California

a. Conforms to these provisions.
b. Does not conform to these provisions.
c. Has a higher deduction of 50%. 
d. None of the above.

38. Depreciation methods and useful lives of trade or business property must be acceptable to California. If an unacceptable method was used before the move into California, to compute the basis in the property use

a. The MCRS method.
b. The Half-year convention.
c. The straight line method. 
d. The double-declining balance method.

39. Both California and federal law provide for accelerated write-off of pollution control facilities located anywhere in the nation.

True False

40. Federal law requires a 15-year recovery period for depreciation of qualified leasehold improvements and qualified restaurant property acquired before 01/01/2006. For California purposes, the recovery period is

a. Also 15 years.
b. 20 years.
c. 39 years. 
d. 5 years.