Question 1

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

Accepted Answer

Capital expenditures must be differentiated from expenditures from currently deductible repairs and maintenance which keep an asset in normal operating order.

Question 2

During 2015 and 2016, Danny pays property taxes of $3,500 each year on a piece of land. During 2015, the land is vacant and unproductive. In 2016, Danny uses the land as a parking lot and generates $16,000 in income. Which of the following is true regarding the property taxes?

Accepted Answer

A taxpayer may elect to capitalize the expenses on unimproved and unproductive real estate each year. Therefore, Danny may either capitalize or deduct the $3,500 in 2015 but he must deduct the $3,500 in 2016.

Question 3

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.

Accepted Answer

While the expenses are used to influence legislation on the local level, they are not of direct interest to Swank's business.

Question 4

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?

Accepted Answer

Investment-related expenses are deductible, usually as a miscellaneous itemized deductions, but if tax-exempt securities are held, some of the investment expense will be allocated to these securities and disallowed.

Question 5

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

Accepted Answer

Fines and penalties are contrary to public policy.

Question 6

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

Accepted Answer

For new business ventures, the key to current deduction of business investigation and pre-opening costs or capitalization and amortization of those costs rests on whether the taxpayer is already engaged in a similar business.

Question 7

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.

Accepted Answer

Only lobbying expenses to influence local legislation are deductible.

Question 8

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?

Accepted Answer

The IRC disallows a deduction for two-thirds of anypayment the taxpayer makes for damages resulting from a conviction (or a guilty or no-contest plea) in any criminal violation of federal antitrust laws. $1,200,000/3 = $400,000

Question 9

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

Accepted Answer

While lobbying expenses may be deductible under very limited criteria, contributions to political candidates or political parties are never allowed as a deduction.

Question 10

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?

Accepted Answer

Interest incurred to acquire tax-exempt investments is not deductible. Deductible investment interest expense is not enumerated in Sec. 62 as a "for AGI" deduction so it is a "from AGI" deduction.

Question 11

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

Accepted Answer

The income derived from a tax-exempt security is not taxable so the expenses that support the nontaxable investment are not deductible.

Question 12

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?

Accepted Answer

Separate elections to capitalize the property taxes are allowed on the different properties.

Question 13

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

Accepted Answer

Bribes and fines are not deductible. $100,000 + $15,000 = $115,000.

Question 14

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?

Accepted Answer

No deduction is allowed for a political contribution.

Question 15

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

Accepted Answer

$200,000 + $60,000 + $70,000 = $330,000. While ordinary expenses of illegal businesses are generally deductible, bribes of government officials are not deductible.

Question 16

Ronna is a professional golfer. In order to correct her vision, Ronna has eye surgery. The costs of the surgery and subsequent medical care are not covered by insurance. What tax issues should Ronna consider?

Accepted Answer

The answer of Ronna is a professional golfer. In order...

Question 17

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

Accepted Answer

All of the specified factors are important in distinguishing between capital and revenue expenditures.

Question 18

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.

Accepted Answer

A taxpayer can elect to immediately deduct up to $5,000 of start-up expenditures, with the balance amoritized over 180 months. Limitations apply when expenditures exceed $50,000.

Question 19

Mickey has a rare blood type and sells his blood for payment on a regular basis. In order to maintain the quality of his blood, Mickey takes expensive vitamins and nutritional supplements. What tax issues should Mickey consider?

Accepted Answer

The answer of Mickey has a rare blood type and...

Question 20

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

Accepted Answer

Illegal payments to governmental officials are contrary to public policy.

Quiz 6: Deductions and Losses