Deck 5: Business Deductions

Question 1

Two-thirds of treble damage payments under the antitrust law are not deductible.

Answer 1

True

Question 2

Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business.

Answer 2

False

Question 3

LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building.The gross receipts of the partnership are less than $100,000.LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year.

Answer 3

False

Question 4

Jacques, who is not a U.S.citizen, makes a contribution to the campaign of a candidate for governor.Cassie, a U.S.citizen, also makes a contribution to the same campaign fund.If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible, while that by Jacques is not.

Question 5

The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of a shareholder-employee's gross income, but results in an increase in the taxable income of the corporation.

Question 6

For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.

Question 7

Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.

Question 8

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense.If the same amount is paid to the CEO of IBM, only $1 million is deductible.

Question 9

None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.

Question 10

If a taxpayer operates an illegal business, no deductions are permitted.

Question 11

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

Question 12

Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.

Question 13

Isabella owns two business entities.She may be able to use the cash method for one and the accrual method for the other.

Question 14

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Question 15

An expense need not be recurring in order to be "ordinary."

Question 16

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

Question 17

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

Question 18

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.

Question 19

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Question 20

Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income.

Question 21

For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party.

Question 22

Land improvements are generally not eligible for cost recovery.

Question 23

Purchased goodwill must be capitalized, but can be amortized over a 60-month period.

Question 24

Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.

Question 25

Marge sells land to her adult son, Jason, for its $20,000 appraised value.Her adjusted basis for the land is $25,000.Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge).

Question 26

Property which is classified as personalty may be depreciated.

Question 27

The cost recovery period for 3-year class property is 4 years.

Question 28

The limit for the domestic production activities deduction (DPAD) uses all W-2 wages paid to employees by the taxpayer during the tax year.

Question 29

If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction because of the taxable income limitation, the product of the amount not allowed multiplied by the DPAD percentage rate (currently 9%) can be carried over for 5 years.

Question 30

The cost of depreciable property is not a research and experimental expenditure.

Question 31

Antiques may be eligible for cost recovery if they are used in a trade or business.

Question 32

If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months.

Question 33

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

Question 34

All personal property placed in service in 2017 and used in a trade or business qualifies for additional first-year depreciation.

Question 35

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

Question 36

The domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying a percentage rate (currently 9%) times adjusted gross income.

Question 37

If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

Question 38

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

Question 39

Research and experimental expenditures do not include the cost of consumer surveys.

Question 40

The key date for calculating cost recovery is the date the asset is placed in service.

Question 41

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

Question 42

Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.

Question 43

Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.

Question 44

For a new car that is used predominantly in business, the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation.

Question 45

Motel buildings have a cost recovery period of 27.5 years.

Question 46

The inclusion amount for a leased automobile is adjusted by a business usage percentage.

Question 47

If an automobile is placed in service in 2017, the limitation for cost recovery in 2019 will be based on the cost recovery limits for the year 2017.

Question 48

Property used for the production of income is not eligible for § 179 expensing.

Question 49

The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition.

Question 50

Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.

Question 51

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

Question 52

Taxpayers may elect to use the straight-line method under MACRS for personalty.

Question 53

The § 179 deduction can exceed $510,000 in 2017 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.

Question 54

The luxury auto cost recovery limits applies to all automobiles.

Question 55

A used $35,000 automobile that is used 100% for business is placed in service in 2017.If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured.

Question 56

All listed property is subject to the substantiation requirements of § 274.

Question 57

Under the MACRS straight-line election for personalty, only the half-year convention is applicable.

Question 58

The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.

Question 59

For personal property placed in service in 2017, the § 179 maximum deduction is limited to $510,000.

Question 60

The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used.

Question 61

MACRS depreciation is used to compute earnings and profits.

Question 62

Intangible drilling costs must be capitalized and recovered through depletion.

Question 63

On June 1 of the current year, Tab converted a machine from personal use to rental property.At the time of the conversion, the machine was worth $90,000.Five years ago Tab purchased the machine for $120,000.The machine is still encumbered by a $50,000 mortgage.What is the basis of the machine for cost recovery?

A)$70,000
B)$90,000
C)$120,000
D)$140,000
E)None of the above

Question 64

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

Question 65

The amortization period for $58,000 of startup expenses is 180 months.

Question 66

Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.

Question 67

If startup expenses total $53,000, $51,000 of those costs are amortized over 180 months.

Question 68

A purchased trademark is a § 197 intangible.

Question 69

In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research.Crow had held the property for four months as inventory.Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

Question 70

For real property, the ADS convention is the mid-month convention.

Question 71

On December 20, 2017, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity.The payment, which is made on April 11, 2018, may be claimed as a deduction for tax year 2017.

Question 72

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

Question 73

Tara purchased a machine for $40,000 to be used in her business.The cost recovery allowed and allowable for the three years the machine was used are computed as follows. $$\begin{array} { c c c } & \text { Cost Recovery Allowed } & \text { Cost Recovery Allowable } \\\text { Year 1 } & \$ 16,000 & \$ 8,000 \\\text { Year 2 } & 9,600 & 12,800 \\\text { Year 3 } & 5,760 & 7,680\end{array}$$ If Tara sells the machine after three years for $15,000, how much gain should she recognize?

A)$3,480
B)$6,360
C)$9,240
D)$11,480
E)None of the above

Question 74

A taxpayer may elect to use the alternative depreciation system (ADS) to compute depreciation for earnings and profits.

Question 75

Goodwill associated with the acquisition of a business cannot be amortized.

Question 76

Grape Corporation purchased a machine in December of the current year.This was the only asset purchased during the current year.The machine was placed in service in January of the following year.No assets were purchased in the following year.Grape Corporation's cost recovery would begin:

A)In the current year using a mid-quarter convention.
B)In the current year using a half-year convention.
C)In the following year using a mid-quarter convention.
D)In the following year using a half-year convention.
E)None of the above.

Question 77

The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years.

Question 78

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $10,000.Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Question 79

Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.

Question 80

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2016 of $5,000.In 2017, Heron made a further charitable contribution of $20,000.Heron's 2017 deduction is limited to $15,000 (10% of taxable income).The 2017 contribution must be applied first against the $15,000 limitation.