Question 1

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 answer of During the current year, the United States...

Question 2

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

Accepted Answer

The answer of Fines and penalties are tax deductible if...

Question 3

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

C)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 4

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

Accepted Answer

Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible according to the Internal Revenue Service (IRS). This is because the interest income earned from the tax-exempt securities is already exempt from federal income tax, and allowing a deduction for the interest expense would result in a double tax benefit.

Question 5

During 2016 and 2017, Danny pays property taxes of $3,500 each year on a piece of land. During 2016, the land is vacant and unproductive. In 2017, 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

The property taxes paid by Danny are considered an operating expense and can be deducted in the year they are incurred. Therefore, option B is acceptable.

However, if the land was considered an investment property, option C would be the best choice. In that case, the property taxes paid in 2016 would be capitalized and added to the cost of the land. When the land is put to use in 2017 and generates income, the capitalized cost is depreciated over time as an expense, along with the property taxes paid in 2017. Therefore, both options B and C are acceptable depending on the nature of the land (i.e. investment property or not).

Question 6

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

Accepted Answer

Kickbacks and bribes paid to federal officials are not deductible, regardless of whether they are related to the taxpayer's trade or business. It is illegal to bribe a federal official and the IRS does not allow a deduction for illegal activities.

Question 7

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

Accepted Answer

Capital expenditures are investments made into a property that add value, extend its useful life, or restore it to its original condition. These expenditures are typically considered improvements to the property and can increase its overall worth.

Question 8

Kaitlyn owns a hotel in Phoenix, Arizona. The Arizona legislature has proposed legislation to increase the hotel room tax. Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation. Kaitlyn can deduct the $1,000.

Accepted Answer

Lobbying expenses that are of direct interest to a taxpayer's business can only be deducted if related to local legislation.

Question 9

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 10

Kaitlyn owns a hotel in Phoenix, Arizona. The city of Phoenix has proposed legislation to increase the hotel room tax. Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation. Kaitlyn can deduct the $1,000.

Accepted Answer

Lobbying expenses incurred to influence legislation that may have an impact on a business or trade are generally deductible as business expenses. Therefore, Kaitlyn can deduct the $1,000 lobbying expenses to discourage the passage of the proposed legislation.

Question 11

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

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

Question 12

Jimmy owns a trucking business. During the current year he incurred the following: $$\begin{array} { | l | r | } 
\hline \text { Gasoline and oil } & \$ 100,000 \
\hline \text { Maintenance } & \$ 15,000 \
\hline \text { Fines for speeding } & \$ 8,000 \
\hline \text { Bribes to government inspection officials } & \$ 21,000 \
\hline
\end{array}$$ The fines for speeding were a necessary cost because missing deadlines would cause lost business and are ordinary in the industry. What is the total amount of deductible expenses?

Accepted Answer

Fines for speeding are deductible because they are ordinary and necessary expenses in the trucking industry. Bribes to government inspection officials are not deductible because they are illegal.

Question 13

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

During construction, Ivan has the option to either capitalize or deduct the property taxes. He may elect to capitalize property taxes on one property and deduct the property taxes on the other property for each year. This decision should be based on factors such as the property's useful life and future income potential. It is not necessary to capitalize property taxes on both properties, and it is not allowed to deduct property taxes on both properties. It is also not possible to capitalize property taxes for one year and then deduct them the next year.

Question 14

A taxpayer opens a new business this year. Prior to opening, she incurred $45,000 of business investigation and preopening costs. The taxpayer can elect to currently deduct $5,000 and amortize the balance over 180 months.

Accepted Answer

This is correct according to IRS regulations. The taxpayer can elect to deduct $5,000 of these costs in the current year and amortize the remaining $40,000 over 180 months (15 years) starting in the year that the business opens. This election is made on Form 4562.

Question 15

A sole proprietor contributes to the election campaign of a state governor. The candidate has promised to change a law that severely limits the growth of the sole proprietor's business. Given the direct benefit, the sole proprietor can deduct the contribution.

Accepted Answer

Political contributions, even if they directly benefit the business or individual, are not tax deductible as they are considered personal expenses.

Question 16

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

Investment interest expense is deductible up to the amount of investment income received. Since the investment interest expense is allocated equally between the taxable and tax-exempt investments, half of it ($9,000) can be deducted against taxable income and the other half is not deductible. Therefore, the $9,000 of investment interest expense is deductible from AGI.

Question 17

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

Accepted Answer

All of the options listed are important factors in distinguishing between capital and revenue expenditures. Capital expenditures are those that improve or enhance the value of the property, while revenue expenditures are those that maintain or repair the property. The distinction between the two is important for accounting and tax purposes.

Question 18

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 19

Ben is a well-known professional football quarterback. His team's owners expect him to be a role model for young people. Any endorsement contracts that he receives are based on his reputation. In the current year, Ben is charged with assault. Ben hires an attorney to represent him in this matter. Ultimately, the charges are dismissed. What tax issues should Ben consider?

Accepted Answer

The answer of Ben is a well-known professional football quarterback....

Question 20

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.

Quiz 21: Deductions and Losses