QUESTIONS AND ANSWERS

QUESTIONS AND ANSWERS

EXAM

CSLB CONTRACTOR'S LAW AND BUSINESS EXAM

QUESTIONS AND C

TESTED AND CONFIRMED A+ ANSWERS

Exam 1 Material • Review the 3 long form problems from Exam 1 to prepare for the tax return component of

the exam (don’t worry about the parts that are crossed off):

• Gross income and above the line deductions
• Itemized deductions
• Individual income tax formula

• Understand above the line deductions, below the line deductions, and tax credits – see #23 • Determining filing status and dependent status – see #18-22 • Tax rate structures – see #2 • Various tax rate measures: marginal tax rate, effective tax rate, average tax rate – see #1, #5 • Due dates, extensions, and statute of limitations – see #7-8 • Losses on business assets vs. losses on capital assets ($3,000 limit only on latter) – see #10 • Taxability of Social Security benefits – see #9 (I’ll give you the details for the calculation) • Timing strategies and calculating NPV – see #11, #13 • Deductibility of self-employment taxes and health insurance premiums for a self-employed individual – see #17 Exam 2 Material • Taxability of interest and dividends – see #1 • Calculating gain/loss on stock sale – see #2 • Netting process for ST and LT capital gains/losses – see #4-5 • Net investment income tax – see #6 • Calculating tax basis in a partnership interest – see #23 • Limitations on passive losses (tax basis, then at-risk, then passive income) – see #7

• Exception for real estate losses – see #8

• Tax consequences of independent contractor vs. employee – see #13 • Calculating self-employment taxes – see first long form problem • Child tax credit and phase out – see first long form problem • Lifetime learning credit – see #12 • American opportunity credit – see first long form problem • Earned income credit – see first long form problem • Ordering of tax credits when calculating tax due – see #14 and the first long form problem • Cash vs. Accrual method – review second long form problem

• Rules for bad debt – see #19

• Depreciation – understand how to apply Section 179 immediate expensing, bonus depreciation, and regular depreciation, see last long form problem

• Understand how calculation changes for assets that are partially personal-use #24
• Understand NPV consequences of bonus depreciation #25

• Jake has $86,525 of taxable income and $5,000 of nontaxable income. Using the 2020 tax

rate table for single filers in the Appendix, answer the following questions.

a) What is his tax due? (2 points)

b) What is his average tax rate? (2 points)

c) What is his effective tax rate? (2 points)

d) Jake is considering contributing $4,000 to his traditional IRA account. What would be his

marginal tax rate on the contribution? (2 points)

• Which type of tax rate structure imposes a decreasing tax rate as the tax base increases? Also,

give a real world example of this type of tax rate structure. (3 points)

Tax Rate Structure:

Example:

• Alec has the choice to invest in city of San Diego bonds or Taylor, Inc. corporate bonds that

pay [x]% interest. Alec is a single taxpayer whose marginal tax rate is [y]%. Assume that the city of San Diego bonds and the Taylor, Inc. bonds have similar risk. What interest rate would the city of San Diego have to pay in order to make Alec indifferent between investing in the city of San Diego and the Taylor, Inc. bonds? (2 points)

• Because the new tax law almost doubled the standard deduction, far less homeowners are

able to benefit from the mortgage interest deduction. In other words, home owners and renters with similar gross income are more likely to pay the same amount of taxes under the new law. Thus, doubling of the standard deduction increased equity between taxpayers that own homes and taxpayers that rent. (2 points)

• horizontal
• vertical

• An individual taxpayer, who currently leases a car for business purposes, is trying to decide

whether to buy a car. To compare the relative merits of renting versus buying, the taxpayer is calculating the value of interest and depreciation deductions if a car were purchased. What measure of tax rate should the individual use when performing this calculation? (2 points)

• Effective tax rate
• Marginal tax rate
• Average tax rate
• Taxes are irrelevant in this example

• Elizabeth Murphy qualifies to file as head of household because she lives with her daughter

who is a dependent. What is the minimum filing threshold for Elizabeth? (2 points)

• $12,400
• $14,050
• $18,650
• $24,800
• Joe Oswald filed his 2020 tax return on March 30, When does the statute of limitations

expire on his 2020 tax return? (2 points)

• April 15,
• March 30,
• October 15,
• None of the above

• If Sydney requests an extension to file her 2020 individual tax return, what is the latest she

could file her return without a failure-to-file penalty? (2 points)

• January 15,
• April 15,
• July 15,
• October 15,

• Mike Byson is a single retiree who collected $30,000 of Social Security benefits in 2020. His

modified AGI is $40,000. Based on the information provided below, how much of the benefits are taxable for Mike? (3 points) Taxability of Social Security Benefits for a Single Filer • If modified AGI + 50% of SS benefits ≤ $25,000, not taxable • If $25,000 < modified AGI + 50% of SS benefits ≤ $34,000, taxable amount is the lesser of (a) 50% of the SS benefits or (b) 50% of (modified AGI + 50% of Social Security benefits −

$25,000)

• If modified AGI + 50% of SS benefits > $34,000, taxable amount is the lesser of: (a) 85% of SS benefits or (b) 85% of (modified AGI + 50% of Social Security benefits − $34,000) + lesser of ($4,500 or 50% of Social Security benefits)

• During 2020, Jason sold a hot dog truck for $8,000 which had been used in his business. He

originally purchased the truck for $45,000, and the truck had $30,000 of accumulated depreciation when it was sold. He also sold some stock he held as an investment for a $4,000 loss. What is the combined effect of these two items that will get recognized in Jason’s 2020 AGI? (2 points)

• $3,000 loss
• $10,000 loss
• $11,000 loss
• $7,000 loss

• Dr. Melfi, an eye surgeon who uses the cash basis for tax purposes, can either pay a $10,000

electricity bill the last week of December or the first week of January. Dr. Melfi expects to face a marginal tax rate of 32% this year and 35% next year. Assuming Dr. Melfi’s discount rate is 6%, calculate and enter the NPV of the tax benefit if she pays the bill this year and if she pays the bill next year. Then determine whether Dr. Melfi should pay the bill this year or next year. (3 points)