Question 1

Troy incurs the following expenses in his business,an illegal gambling establishment: $$\begin{array} { | l | r | } 
\hline \text { Salaries to employees } & \$ 200,000 \
\hline \text { Insurance expense } & 60,000 \
\hline \text { Utilities expense } & 70,000 \
\hline \text { Bribes to police } & 50,000 \
\hline
\end{array}$$ His deductible expenses are

Accepted Answer

Under U.S. tax law, ordinary and necessary business expenses are generally deductible, even for illegal businesses. However, bribes are not deductible. Therefore, the deductible expenses are salaries, insurance, and utilities, totaling $330,000.

Question 2

Toni owns a gourmet dog treat shop downtown.She spends $2,800 investigating opening another dog treat shop in Northtown and an additional $3,100 investigating a new location in Southtown.Toni does open the Northtown shop,but does not open the Southtown shop.

Accepted Answer

The answer of Toni owns a gourmet dog treat shop...

Question 3

Business interest expense is limited for larger businesses.Which of the following statements is not correct with respect to this limitation?

Accepted Answer

The limitation applies to businesses with average annual gross receipts exceeding $25 million, not $10 million.

Question 4

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

According to IRS publication 535, "Business investigation expenses incurred in the course of a taxpayer's existing trade or business are currently deductible if the expenses are related to a new trade or business that the taxpayer intends to start or acquire."

Question 5

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

Under U.S. tax law, companies can deduct settlement payments related to business activities unless they are fines or penalties. Since Box and Cable settled for $1,200,000 each, they can deduct the entire settlement amount unless it is considered a penalty. However, the maximum deduction is limited to the actual settlement amount paid, which is $1,200,000. The choice of $400,000 is incorrect, as it does not reflect the full settlement amount paid by each company.

Question 6

Tory considered opening a cupcake store in Denver.Tory is currently a full-time dentist.After spending $8,600 on a market study,he decided against opening the store on August 1.What is the maximum amount of deduction for the current year attributable to this expenditure?

Accepted Answer

The $8,600 spent on a market study is considered a startup cost. Since Tory decided not to proceed with the business, these costs are not deductible as they are considered personal expenses.

Question 7

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?

Accepted Answer

Lobbying expenses and political contributions are generally not deductible for tax purposes.

Question 8

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?

Accepted Answer

The maximum amount of deduction allowable for start-up costs is $5,000. However, Marcus has exceeded this limit with the total cost of $8,600. Therefore, he can only deduct up to $5,000 and the remaining $3,600 must be amortized over 180 months ($20 each month). Thus, the maximum amount of deduction for the current year attributable to these expenditures is $5,100 ($2,300 + $2,700 + $1,100 amortization of the professional fees). Hence, the best choice is C.

Question 9

Toby,owner of a cupcake shop in New York,had been considering opening a similar business (i.e.,a cupcake shop)in Phoenix.After spending $6,800 investigating such possibilities in Phoenix,Toby decided against opening the store on July 1.What is the maximum amount of deduction for the current year attributable to these expenditures?

Accepted Answer

The answer of Toby,owner of a cupcake shop in New...

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 related to local legislation are generally not deductible for tax purposes.

Question 11

Pat,an insurance executive,contributed $1,000,000 to the reelection 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

Political contributions are not tax-deductible. Therefore, Pat cannot deduct any portion of the $1,000,000 contribution on her tax return.

Question 12

Rachel is a self-employed business consultant.As a necessary and ordinary component of running and growing her business,she incurs significant expenses for travel and business meals with clients,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.

Accepted Answer

The answer of Rachel is a self-employed business consultant.As a...

Question 13

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

Accepted Answer

All of the factors mentioned are important in distinguishing between capital and revenue expenditures. Capital expenditures are those that improve or add value to the property, while revenue expenditures are those that restore or maintain the property's current value. A betterment is a type of capital expenditure that provides a substantial improvement to the property, such as adding a new room or upgrading the plumbing system. Therefore, all three factors are important in determining whether an expense should be classified as a capital or revenue expenditure.

Question 14

During 2019 and 2020,Danny pays property taxes of $3,500 each year on a piece of land.During 2019,the land is vacant and unproductive.In 2020,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

When land is vacant and unproductive, property taxes are capitalized. When land is used in a trade or business, property taxes are deductible.

Question 15

2020 Enterprises,owned by Xio who also manages the businesses,has generated more than $30 million of sales for each of the past five years.This year it is reporting the following income and deduction amounts: $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 35,000,000 \
\hline \text { Cost of goods sold } & ( 22,000,000 ) \
\hline \text { Other operating expenses } & ( 8,000,000 ) \
\hline \text { Depreciation } & ( 2,000,000 ) \
\hline \text { Preliminary taxable income } & \$ 3,000,000 \
\hline
\end{array}$$ Xio just received a statement from the bank reporting interest expense of $1,800,000 on a loan to 2020 Enterprises to fund operations and equipment purchases.How much of the interest expense can 2020 Enterprises deduct in computing this year's taxable income?

Accepted Answer

The answer of 2020 Enterprises,owned by Xio who also manages...

Question 16

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

Gasoline and oil, maintenance, and fines for speeding are all deductible expenses. Bribes to government inspection officials are not deductible. So, the total amount of deductible expenses is $100,000 + $15,000 + $8,000 = $123,000.

Question 17

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

Since Emeril borrowed money to invest in both taxable and tax-exempt investments, the investment interest expense must be allocated between the two based on the proportion of the borrowed funds used for each investment.

Let's say Emeril invested X dollars in taxable investments and Y dollars in tax-exempt investments, where X+Y = $340,000 (total amount borrowed).

Since the investment interest expense of $18,000 is equally allocated between the two investments, we can set up the following equation:

0.5 * $18,000 = (X/$340,000) * $18,000 + (Y/$340,000) * $18,000

Simplifying the equation, we get:

$9,000 = X/(X+Y) * $18,000

Solving for X, we get:

X = $170,000

Therefore, Emeril invested $170,000 in taxable investments and $170,000 in tax-exempt investments.

Since the investment interest expense allocated to the taxable investments is $9,000 ($18,000 * $170,000/$340,000) and the investment interest expense allocated to the tax-exempt investments is also $9,000 ($18,000 * $170,000/$340,000), only one-half of the investment interest expense ($9,000) is deductible, and it is deductible from AGI.

Therefore, the answer is D: $9,000 from AGI.

Question 18

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

According to the regulations, a taxpayer may elect to capitalize the property taxes for one property while deducting the property taxes for the other property in the tax year. Therefore, Ivan may elect to capitalize the property taxes on the hotel while deducting the property taxes on the office building, or vice versa. This allows for some flexibility in how the property taxes are treated for tax purposes during the construction period.

Question 19

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 true. The taxpayer has the option to deduct $5,000 in the current year and amortize the remaining $40,000 over the next 180 months. This is allowed under Section 195 of the Internal Revenue Code.

Question 20

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

Accepted Answer

Lobbying expenses are generally not deductible, even if the legislation is directly related to the taxpayer's trade or business, as per IRS regulations.

Quiz 22: Deductions and Losses