Question 1

In 2015 the IRS audits a company's 2013 tax return and determines that the president's salary was excessive and disallowed $100,000 of the salary deduction. Under the terms of the hedge (payback) agreement in the corporate bylaws, the president repays $100,000 of her salary to her employer in 2015. The president will amend her 2013 tax return to get a refund of the taxes paid on the excess salary.

Accepted Answer

The president will take a deduction for AGI for the year of repayment.

Question 2

Abby owns a condominium in the Great Smokey Mountains. During the year, Abby uses the condo a total of 21 days. The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500. Abby incurs the following expenses:  Using the IRS method of allocating expenses, the amount of depreciation that Abby may take with respect to the rental property will be

Accepted Answer

11eac5e3_b0c4_b238_a396_0b6bf4e463c7_TB5639_00

Question 3

During the current year, Jack personally uses his summer home for 25 days. He also rented his summer home to a group of vacationers for 12 days for $600 per day. How much income does Jack report from the rental of his summer home?

Accepted Answer

The answer of During the current year, Jack personally uses...

Question 4

Gabby owns and operates a part-time art gallery, now in its fifth year. She views it as a business activity, but she is concerned that the IRS will challenge her classification and consider it a hobby. Her business results, using the cash method of accounting, were net losses in the first and fourth years and small profits in the second and third years. It is now almost year-end and based on projections, the business is showing a small profit of $6,000. Repairs to the security system and to the heating/cooling system were recently completed and these bills total $7,000. When should Gabby pay these bills?

Accepted Answer

With profits in only two out of the preceding four years, Gabby will want to report a profit this year. The business is cash basis so paying the bill next year will defer the deduction to next year, resulting in a profit this year. A profit in three out of five years isn't determinative of business (rather than hobby) status, but it shifts the burden of proof to the IRS.

Question 5

The Super Bowl is played in Tasha's home town. Tasha moves out of her house for 10 days and stays with her parents. She rents her house for a very high fee to a crew from ESPN. With respect to this rental activity, Tasha will

Accepted Answer

The 10 days of rental qualifies under the exception for rental for a nominal number of rental days . She will not be required to report the income, but she will not take any deductions other than her normal mortgage interest and property taxes.

Question 6

Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days. For tax purposes, the houseboat is classified as

Accepted Answer

Since Vanessa's personal use of 25 days does not exceed 10% of the rental days (280 × .10 = 28 days), then the houseboat is not considered a residence under Section 280A. Neither is the use considered nominal since rental days exceed 14. Therefore, the houseboat is classified as rental property.

Question 7

Nikki is a single taxpayer who owns a vacation cottage on the lake. During the year, she rented it for $2,000 for 14 days, lived in it for 56 days, and left it vacant the remainder of the year. The year's expenses amounted to $5,000 interest expense, $800 property taxes, $1,500 utilities and maintenance, and $2,400 depreciation. Using the IRS method of allocating expenses, how much of the property-related expenses will be deductible for AGI?

Accepted Answer

When property is rented for 14 days or less, the property is treated as 100% personal. None of the expenses are deductible for AGI, but none of the rental income has to be reported.

Question 8

Anita has decided to sell a parcel of land she had been holding for investment purposes. She purchased the land 5 years ago for $10,000. The current fair market value is $6,000. Anita's sister, Kathy, is interested in buying the land as is Anita's friend, Marcia. What tax issues should Anita consider when deciding to whom the land should be sold?

Accepted Answer

The answer of Anita has decided to sell a parcel...

Question 9

Diane, a successful accountant with an annual income of $150,000, also enjoys raising and training race horses, an activity in which she spends about 10 hours per week. Over the past five years her winnings from races have amounted to $20,000. She employs neighborhood children to feed the horses but has a professional trainer who works with the horses about 5 hours per week. Discuss some of the factors that might enter into the determination of whether or not this activity is a hobby or a trade/business.

Accepted Answer

The answer of Diane, a successful accountant with an annual...

Question 10

Tess has started a new part-time business. She is concerned that the IRS will call it a hobby if her return is audited. This first year of business showed a small profit, and she expects it to continue to show modest profits. She would like to take advantage of the three out of five year profit rule to shift the burden of proof to the IRS. Because of the three-year statute of limitations, this will not be possible for the first year of business.

Accepted Answer

Tess can file a special election to defer the determination until the fifth year of operation.

Question 11

During the current year, Paul, a single taxpayer, reported the following items:  Compute Paul's taxable income for the year.

Accepted Answer

The answer of During the current year, Paul, a single...

Question 12

Discuss tax planning considerations which a taxpayer may use to possibly avoid classification of an activity as a hobby.

Accepted Answer

The answer of Discuss tax planning considerations which a taxpayer...

Question 13

Brent must substantiate his travel and entertainment expenses. Which of the following is not required for documentation?

Accepted Answer

All but the company expense report are specifically required under the substantiation rules.

Question 14

Lindsey Forbes, a detective who is single, operates a small pottery activity on a part-time basis. This year she reported the following income and expenses from this activity:  In addition, she had salary of $70,000 and itemized deductions, not including expenses listed above, of $6,800.
a. What is the amount of Lindsey's taxable income assuming the activity is classified as a hobby?
b. What is the amount of Lindsey's taxable income assuming the activity is classified as a trade or business?

Accepted Answer

The answer of Lindsey Forbes, a detective who is single,...

Question 15

Mackensie owns a condominium in the Rocky Mountains. During the year, Mackensie uses the condo a total of 23 days. The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900. Mackensie incurs the following expenses in the condo:  Using the court's method of allocating expenses, the amount of depreciation that Mackensie may take with respect to the rental property will be

Accepted Answer

11eac5e3_b0c4_6416_a396_d76c0076881f_TB5639_00 Note that the potential depreciation deduction is 77/100 × $11,000 = $8,470, but it is limited to the remaining income after taking all other deductions into account.

Question 16

Margaret, a single taxpayer, operates a small pottery activity in her spare time. During the current year, she reported the following income and expenses from this activity which is classified as a hobby:  In addition, she had salary of $75,000 and itemized deductions, not including those listed above, of $2,200.
What is the amount of her taxable income?

Accepted Answer

The answer of Margaret, a single taxpayer, operates a small...

Question 17

Explain the rules for determining whether a home is considered a rental property or a vacation home and the tax consequences of this classification.

Accepted Answer

The answer of Explain the rules for determining whether a...

Question 18

Ola owns a cottage at the beach. She and her family use the property for 30 days during the summer season and rent it to unrelated parties for 60 days. The rental receipts amount to $8,000. Total costs of operating the property are as follows:  In addition, potential depreciation expense is $9,000.
a. Is the cottage subject to the vacation home rental limitations of IRC Sec. 280A?
b. How much of expenses can Ola deduct?

Accepted Answer

The answer of Ola owns a cottage at the beach....

Quiz 6: Deductions and Losses