Question 1

RollerQueens Inc.,a calendar-year accrual method taxpayer,enters into a contract each September with a cleaning service to clean the arena after each game during the team's October through March season.Under the criteria of the economic performance test,the RollerQueens Inc.'s deduction for cleaning expense

Accepted Answer

A) Because the all-events test is satisfied (the liability is fixed), the expense recurs every year, economic performance occurs within the requisite period of time, and the item is not material, the taxpayer can take the deduction for the entire expense in the year in which the taxpayer and service provider enter into the contract.

Question 2

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?

Accepted Answer

A) Credit card charges are deductible in the year the charge is made regardless of the year in which the payment is made, but open account charges are not deducted until paid.

Question 3

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

Accepted Answer

The wash sale limitations prevent the creation of artificial losses for tax purposes.

Question 4

On July 1 of the current year,Marcia purchases a small office building to use in her business and borrows $320,000.Marcia is required to pay two points on the loan.The loan is secured by the property 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?

Accepted Answer

B) Prepaid interest expense paid in the form of points is amortized over the life of the loan, unless paid in connection with the purchase or improvement of a principal residence. Prepaid interest: $320,000 × .02 = $6,400. $6,400/20 years × .5 year = $160.

Question 5

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

Accepted Answer

Losses on sales between related parties are not allowed.

Question 6

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.

Accepted Answer

The original seller of the property in a related party sale will never recognize the loss, but if the purchaser later sells the property for a gain, the purchaser can offset the gain with the unrecognized loss.

Question 7

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

Accepted Answer

Losses on sales between related parties are not allowed. A shareholder and his more than 50-percent-owned corporation are related parties.

Question 8

Under the accrual method,recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for

Accepted Answer

C) There is no requirement that the expense be material.

Question 9

Three years ago,Myriah refinanced her home mortgage and was required to pay two points on the refinanced loan.The loan was secured by the property,and the charging of points was the established lending practice in the area.The term of the loan was 20 years.Myriah sold the house earlier this year and paid off the refinanced mortgage.In this year of the home sale,is Myriah allowed any deduction with respect to the points paid on the refinanced mortgage?

Accepted Answer

B) The taxpayer is allowed to amortize points paid upon refinancing a home mortgage over the term of the loan. Any unamortized balance at the time of the loan repayment can be deducted.

Question 10

Which of the following statements is false?

Accepted Answer

A) No tax deduction is allowed until warranty work is actually performed.

Question 11

Brienne sells land to her brother,Abe,at a loss.A few years later,Abe sells the land to an unrelated party for a substantial gain.Brienne can recognize her realized loss on the land when Abe sells the land to an unrelated party.

Accepted Answer

Brienne will never recognize the loss. Abe will be able to offset his gain by Brienne's loss.

Question 12

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?

Accepted Answer

B) $240,000 × 2% = $4,800 points paid. 20 years × 12 months per year = 240 months in the loan. $4,800 ÷ 240 = $20.00 per month amortization. Five months this year: $20 × 5 = $100.

Question 13

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

Accepted Answer

A) A cash-basis taxpayer gets the deduction in the year in which interest is paid.

Question 14

Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received?

Accepted Answer

A) There is no requirement for an accrual basis taxpayer to pay an expense in order to get a deduction.

Question 15

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

Accepted Answer

B) The Code specifies that points paid to refinance a home must be capitalized and amortized over the life of the loan.

Question 16

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?

Accepted Answer

B) The prepaid rent is considered a capital expenditure and must be amortized over the period benefitted. ($12,600/36) × 5 = $1,750

Question 17

Discuss when expenses are deductible under the accrual method of accounting.

Accepted Answer

The answer of Discuss when expenses are deductible under the...

Question 18

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.

Accepted Answer

The 61-day period of time extends from 30 days before the date of the sale to 30 days after the date of the sale.

Question 19

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?

Accepted Answer

D) Because these points are paid in connection with the purchase of a principal residence, Marcia may deduct $6,400 ($320,000 × 2%) as interest expense during the current year.

Question 20

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

Accepted Answer

The portion of the loss relating to the shares not replaced will be allowed.

Quiz 6: Deductions and Losses