Deck 12: Deductions and Losses

Question 1

Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible.

Answer 1

True

Question 2

Adjusted gross income (AGI)is the basis for a number of phase-outs of deductions.

Answer 2

True

Question 3

Taxpayers may deduct legal fees incurred in the acquisition of property.

Answer 3

False

Question 4

Itemized deductions are deductions for AGI.

Question 5

Expenses incurred in a trade or business generally are deductions for AGI.

Question 6

Contributions to political candidates are not deductible even if made through the taxpayer's trade or business.

Question 7

An expense is considered necessary if it is "appropriate and helpful" in the taxpayer's business.

Question 8

Kickbacks and bribes paid to federal officials are deductible only if related to the taxpayer's trade or business.

Question 9

Taxpayers may deduct lobbying expenses incurred to influence legislation at any governmental level if the legislation is of direct interest to the taxpayer's trade or business.

Question 10

According to the tax formula,individuals can deduct the greater of for AGI deductions or from AGI deductions.

Question 11

In order for an expense to be ordinary,it must be reasonable in amount and it must bear a reasonable and proximate relationship to the income-producing activity or property.

Question 12

A deduction will be allowed for an expenditure unless the Internal Revenue Code specifically disallows it.

Question 13

At the election of the taxpayer,a current deduction is allowed for the lesser of actual business start-up expenditures incurred or $5,000 with the remainder capitalized and amortized over 180 months. A phaseout of the current deduction applies in the case of start-up expenditures exceeding $50,000.

Question 14

Sue Swank owns a local accounting firm in New Orleans,Louisiana.The city of New Orleans has proposed legislation to increase the hotel room tax.Swank incurs $1,000 lobbying expenses.Because the legislation is local,Swank may deduct the $1,000.

Question 15

Expenses are deductible only if connected to trade or business or property held for the production of income.

Question 16

Generally,expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.

Question 17

Fines and penalties are tax deductible if related to the taxpayer's trade or business.

Question 18

Individuals are allowed to deduct the greater of the standard deduction or itemized deductions.

Question 19

Capital expenditures add to the value,substantially prolong the useful life,or restore the life property.

Question 20

Fees paid to prepare a taxpayer's Schedule C of the tax return (Profit or Loss from Business)are for AGI deductions.

Question 21

If a loss is disallowed under Section 267,a gain on a subsequent sale of the property by the related purchaser may be offset by the previously unrecognized loss.

Question 22

Points paid in connection with the purchase of a principal residence may be deducted in the year paid.

Question 23

Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.

Question 24

Accrual-basis taxpayers are allowed to deduct expenses when they meet either the economic performance test or the all-events test.

Question 25

Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.

Question 26

Rachel has significant travel and entertainment expenses for her work,but she has not kept receipts. She will be able to deduct a reasonable amount of these ordinary and necessary expenses under the Cohan rule.

Question 27

The vacation home limitations of Section 280A may also apply to boats and mobile homes.

Question 28

An accrual-basis taxpayer may elect to accrue real property taxes ratably over the period to which the taxes relate.

Question 29

Losses incurred on wash sales of stock or securities are generally disallowed in the year of sale.

Question 30

If property that qualifies as a taxpayer's residence is rented for less than 15 days per year,the taxpayer includes no rental income in gross income and similarly may claim no expenses related to the property other than interest and taxes.

Question 31

Losses on sales of property between a taxpayer and his/her siblings are disallowed.

Question 32

A wash sale occurs when a taxpayer realizes a loss on the sale of stock or securities and the taxpayer acquires substantially identical stock or securities within a 61 day period after the date of sale.

Question 33

Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.

Question 34

Expenses paid with a credit card are deductible at the time a cash-basis taxpayer pays for the charge.

Question 35

Generally,Section 267 requires that the deduction of unpaid (accrued)expenses be deferred until the year in which the related payee recognizes the amount as income.

Question 36

Hobby expenses are deductible as for AGI deductions.

Question 37

Losses on the sale of property between a taxpayer and his/her more than 50-percent-owned corporation are disallowed.

Question 38

Expenses attributable to the rental use of a taxpayer's personal residence are limited to the gross income generated by the property.

Question 39

If an activity produces a profit for at least two years during a consecutive five-year period,the burden of proof shifts to the IRS to show that the activity is not profit-motivated.

Question 40

Under the wash sale rule,if all of the sold shares are not re-purchased within the relevant time period,a portion of the loss on the sale is allowed.

Question 41

To be tax deductible,an expense must be all of the following except

A)ordinary and necessary.
B)paid in cash.
C)reasonable in amount.
D)an expense of the taxpayer.

Question 42

Maria pays the following legal and accounting fees during the year: What is the total amount of her for AGI deduction for these fees?

A)$4,000
B)$6,000
C)$8,100
D)$11,200

Question 43

On Form 1040,deductions for adjusted gross income include the amounts paid for all of the following except

A)alimony.
B)home mortgage interest.
C)student loan interest.
D)moving expenses.

Question 44

Laura,the controlling shareholder and an employee of Southwest Corporation,receives an annual salary of $750,000.Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably-sized corporations,the IRS contends that Laura's salary should be no higher than $600,000.The Court upheld the IRS's position.As a result,which of the following is true?

A)$600,000 is deductible by the corporation; $600,000 is taxable to Laura.
B)$600,000 is deductible by the corporation; $750,000 is taxable to Laura.
C)$750,000 is deductible by the corporation; $750,000 is taxable to Laura.
D)$750,000 is deductible by the corporation; $600,000 is taxable to Laura.

Question 45

Charles is a single person,age 35,with no dependents.In 2014,Charles has gross income of $75,000 from his sole proprietorship.Charles also incurs $80,000 of deductible business expenses in connection with his proprietorship.He has interest and dividend income of $22,000.Charles has no itemized deductions.Charles's taxable income is

A)$6,850.
B)$10,800.
C)$13,050.
D)$17,000.

Question 46

Various criteria will disqualify the deduction of a business or investment related expenditure. Which of the following criteria will not disqualify a business or investment expenditure?
C)expenses are not incurred annually
D)expenses are illegal or in violation of public policy

Question 47

Assume Congress wishes to encourage healthy eating and is considering a deduction for broccoli purchases.In order to maximize the value of this tax deduction for taxpayers,Congress should provide for a

A)miscellaneous deduction.
B)deduction for AGI.
C)deduction from AGI.
D)All of the above would provide the same tax savings to taxpayers

Question 48

Deductions for adjusted gross income include all of the following except

A)contributions to certain retirement plan arrangements.
B)alimony.
C)expenses attributable to production of rental income.
D)unreimbursed employee business expenses.

Question 49

Pamela was an officer in Green Restaurant which subsequently went bankrupt.Pamela started a new restaurant and,to establish goodwill,paid off the debts of $100,000 of Green Restaurant.She was under no obligation to do so.The $100,000 is

A)deductible currently as an itemized deduction.
B)capitalized because the expenses are not ordinary.
C)deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses.
D)None of the above.

Question 50

Which of the following is not required for an expenditure to be deductible as a business or investment expense?

A)recurring in nature
B)ordinary and necessary
C)reasonable in amount
D)incurred by the taxpayer

Question 51

Generally,deductions for adjusted gross income on an individual's tax return include all the following types of expenses except those

A)incurred in gambling activities.
B)incurred in a trade or business.
C)incurred in the production of rent income.
D)incurred in the production of royalty income.

Question 52

Liz,who is single,lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate.Liz had the following items of income and expense during the current year. Income:
Expenses:
What is her adjusted gross income for the year?

A)$52,700
B)$61,100
C)$62,200
D)$68,000

Question 53

Leigh pays the following legal and accounting fees during the year: What is the total amount of her for AGI deduction for these fees?

A)$10,800
B)$14,000
C)$15,000
D)$20,000

Question 54

Carole owns 75% of Pet Foods,Inc.As CEO,Carole must travel extensively and does so on the company jet.In addition,she also uses the jet to take several personal vacations.Carole reports the value of the personal use of the jet,$140,000,as additional compensation.Which of the following is true in terms of the corporation?

A)The corporation includes $140,000 as miscellaneous income.
B)The $140,000 has no impact on the corporation's income tax.
C)The corporation takes a deduction of $140,000 for compensation expense.
D)The corporation takes a deduction of $140,000 for dividend expense.

Question 55

Deductions for AGI may be located

A)on the front page of Form 1040.
B)on Schedule C as a deduction.
C)on Schedule E as a deduction.
D)All of the above are true.

Question 56

The term "principal place of business" includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.

Question 57

In 2014,Sean,who is single and age 44,received $55,000 of gross income and had $5,000 of deductions for AGI and $4,600 of itemized deductions.Sean's taxable income is

A)$39,850.
B)$43,900.
C)$45,400.
D)$41,450.

Question 58

Self-employed individuals may claim,as a deduction for adjusted gross income,50 percent of their

A)traditional IRA contributions.
B)disability insurance premiums.
C)health insurance premiums.
D)self-employment tax.

Question 59

In 2014,Venkat,who is single and age 37,received $60,000 of gross income and had $6,800 of itemized deductions.Venkat's taxable income is

A)$49,250.
B)$53,200.
C)$56,050.
D)$49,850.

Question 60

During the current year,Martin purchases undeveloped land as an investment.Martin intends to rent the land as pastureland and hopefully sell it later for a profit.In the current year,Martin receives no rent but he does pay taxes of $2,800,mortgage interest of $900 and liability insurance of $500.How much of these expenses can Martin deduct (before any limitations)on his current tax return?

A)$0
B)$1,400
C)$3,700
D)$4,200

Question 61

In which of the following situations are points paid on a home mortgage loan not deductible in the year of payment?

A)purchase
B)refinance
C)construction
D)improvement

Question 62

Paul,a business consultant,regularly takes clients and potential clients out to dinner. In order to deduct these expenses,Paul must maintain records substantiating all of the following except:

A)the time and place of the dinners.
B)the business relationship with the person invited.
C)the business purpose of the dinners.
D)All of the above information must be substantiated in order to deduct the entertainment costs.

Question 63

On August 1 of this year,Sharon,a cash method taxpayer,signs a lease for office space and begins business.The lease is for 3 years.At the time the lease is signed,Sharon pays the $12,600 rent for the entire 36-month lease term.How much can Sharon deduct this year?

A)$350
B)$1,750
C)$5,950
D)$12,600

Question 64

Sacha,a dentist,has significant investment assets.She holds corporate bonds,municipal bonds,stocks and mutual funds.Sacha paid $1,500 to an investment adviser to conduct a portfolio review and to prepare a recommendation for rebalancing her portfolio.Which of the following statements is correct regarding the tax treatment of the $1,500 fee?

A)Sacha can include the full fee as an investment-related expense in her miscellaneous itemized deductions.
B)Sacha can include the full fee as an investment-related expense in her "for AGI" deductions.
C)Part of the $1,500 fee will be disallowed due to the holding of the municipal bonds.
D)The $1,500 fee is not deductible.

Question 65

Troy incurs the following expenses in his business,an illegal gambling establishment: His deductible expenses are

A)$0.
B)$200,000.
C)$330,000.
D)$380,000.

Question 66

Jimmy owns a trucking business.During the current year he incurred the following: What is the total amount of deductible expenses?

A)$115,000
B)$123,000
C)$108,000
D)$144,000

Question 67

Mark and his brother,Rick,each own farms.Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle.Mark purchases $2,000 of feed and gives Rick one-half of the feed.Mark tells Rick that there is no need to repay him and to consider the feed a gift.Which of the following statements is true?

A)Mark can deduct $2,000 for the feed.
B)Mark can deduct $1,000 for the feed.
C)Rick must report $1,000 as income.
D)None of the above is true.

Question 68

On July 1 of the current year,Marcia purchases a new home and borrows $320,000.Marcia is required to pay two points on the loan.The loan is secured by the residence and the charging of points is an established business practice in the area.The term of the loan is 20 years,beginning on July 1 of the current year.How much,if any,of the points may Marcia deduct in the current year?

A)$0
B)$160
C)$3,200
D)$6,400

Question 69

Jones,Inc.,a calendar-year taxpayer,is in the air conditioner repair business.The business uses the cash method.In December of the current year,Jones charged $100 of supplies at Refrigeration,Inc.,(he will pay the credit card bill in January)and also purchased $600 of supplies at XYZ on open account (he will make a payment on the open account in January).What is the amount that is deductible by Jones,Inc.,in the current year?

A)$100
B)$600
C)$700
D)The amounts must be capitalized and charged to expense as used.

Question 70

Pat,an insurance executive,contributed $1,000,000 to the re-election campaign of Governor Stephens,in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct?

A)$0
B)$100,000
C)$500,000
D)$1,000,000

Question 71

On August 1 of the current year,Terry refinances her home and borrows $240,000.Terry is required to pay two points on the loan.The loan is secured by the residence and the charging of points is an established business practice in the area.The term of the loan is 20 years,beginning on August 1 of the current year.How much,if any,of the points may Terry deduct in the current year?

A)$0
B)$100
C)$240
D)$4,800

Question 72

Emeril borrows $340,000 to finance taxable and tax-exempt investments.He incurs $18,000 investment interest expense,allocated equally between the taxable and tax-exempt investments.Ignore any possible investment interest expense limitation.How much of the interest expense is deductible,and where is it deductible?

A)$18,000 for AGI
B)$18,000 from AGI
C)$9,000 for AGI
D)$9,000 from AGI

Question 73

Toby,owner of a cupcake shop in New York,is considering opening a similar business (i.e.,a cupcake shop)in Phoenix.After spending $4,200 investigating such possibilities in Phoenix,Toby decides against opening the store.What is the maximum amount of deduction for the current year attributable to these expenditures?

A)$0
B)$420
C)$840
D)$4,200

Question 74

In March of the current year,Marcus began investigating the possibility of opening a specialty clothing store.From March through June,he spent $2,300 on a market survey,$2,700 in consulting fees to find the best location and $3,600 in professional fees setting up an accounting and inventory system.Although he had never run his own business before,on August 1 he opened his doors for business.What is the maximum amount of deduction for the current year attributable to these expenditures?

A)$0
B)$5,000
C)$5,100
D)$8,600

Question 75

American Healthcare (AH),an insurance company,is trying to persuade Congress to enact nationwide anti-smoking legislation. As part of this effort,AH paid $500,000 to hire a lobbying firm to discuss its concerns with members of Congress. AH also contributed $100,000 to candidates for political office who support limiting public smoking. What amount of these expenditures can AH deduct?

A)$0
B)$100,000
C)$500,000
D)$600,000

Question 76

Which of the following factors is important in distinguishing between capital and revenue expenditures?

A)The expenditure improves the property,adding to the value of the property.
B)The expenditure provides a betterment,adding to the value of the property.
C)The expenditure restores the property.
D)All of the above.

Question 77

During 2014 and 2015,Danny pays property taxes of $3,500 each year on a piece of land.During 2014,the land is vacant and unproductive.In 2015,Danny uses the land as a parking lot and generates $16,000 in income.Which of the following is true regarding the property taxes?

A)Capitalize $3,500 each year.
B)Deduct $3,500 each year.
C)Capitalize $3,500 in 2014 and deduct $3,500 in 2015.
D)Either B or C is acceptable.

Question 78

On December 1,Robert,a cash method taxpayer,borrows $10,000 from the bank for use in his business.Under the terms of the loan,the bank discounts the loan by $300,paying Robert the $9,700 cash proceeds.If Robert repays the loan next year,he may deduct

A)$300 next year.
B)$300 this year.
C)$25 this year and $275 next year.
D)nothing since the note is "noninterest-bearing."

Question 79

During the current year,the United States files criminal and civil actions against Joe,the CEO of Box Corporation,and Jane,the president of Cable Corporation,for price fixing.Both enter pleas of no contest and appropriate judgments are entered.Subsequent to this action,Square Corporation sues both Box and Cable for treble damages of $6,000,000.In settlement,Box and Cable each pay Square $1,200,000.What is the maximum amount that Box and Cable may each deduct?

A)$400,000
B)$1,200,000
C)$2,000,000
D)$6,000,000

Question 80

During the current year,Ivan begins construction of an office building and a hotel.He incurs $10,000 in property taxes during the construction of the office building and $15,000 for the hotel.Which of the following statements is true of the property taxes during the construction period?

A)Ivan must capitalize the property taxes on both properties each year if an election is made.
B)Ivan must deduct the property taxes on both properties each year.
C)Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year.
D)Ivan may elect to capitalize the property taxes for the properties in one year and then deduct the property taxes on the properties the next year.