Question 1

Desi Corporation incurs $5,000 in travel,market surveys,and legal expenses to investigate the feasibility of opening a new coffee house in one of the new suburban malls in town.Desi already owns a similar coffee house across town.
a.What is the proper tax treatment of these expenses if Desi decides not to open the new coffee house?
b.What is the proper tax treatment of these expenses if Desi decides to open the new coffee house?
c.Assume that Desi Corp is currently in the cleaning services business and incurs the noted expenses.because it is considering opening a coffee house. Reconsider your responses to parts a and b.

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Question 2

List those criteria necessary for an expenditure to be deductible as business or investment expenses.

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Question 3

Lloyd purchased 100 shares of Gold Corporation common stock for $20 per share for a total basis of $2,000.Several years later,on May 1 of the current year,Lloyd sells all 100 shares for $500.On May 29 of the current year,Lloyd purchases 30 shares of Gold Corporation common stock for $180.
a.How much loss is Lloyd allowed to recognize?
b.What is Lloyd's basis in the 30 new shares?

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Question 4

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

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Question 5

Juanita knits blankets as a hobby and sells them.In the current year,she earns $5,000 from her blanket sales and incurs expenses of $600.Juanita does not itemize deductions.On her tax return,she should

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Question 6

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?

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Question 7

Discuss why the distinction between deductions for AGI and from AGI is important to individuals.

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Question 8

During the current year,Donna,a single taxpayer,reports the following items income of income and expenses:
Income:
  Expenses/losses:
  Compute Donna's taxable income.(Show all calculations in good form.)

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Question 9

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

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Question 10

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

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Question 11

Lindsey Forbes,a detective who is single,operates a small pottery activity in her spare time.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?

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Question 12

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?

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Question 13

During the current year,Lucy,who has a sole proprietorship,pays legal and accounting fees for the following:
  Services rendered in resolving a federal tax deficiency
  Tax return preparation fees:
  What amount is deductible for AGI?

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Question 14

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?

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Question 15

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 rents out the houseboat for a substantial number of days (280), it is classified as rental property. Expenses in excess of income may be deducted, but the net income or loss is subject to the passive activity rules. Therefore, option B is the correct choice.

Question 16

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

Gabby should pay these bills next year because the business is only showing a small profit of $6,000 this year. If she pays the bills before year-end, it will result in a net loss for the current year, which may further fuel the IRS to challenge her classification as a business activity. Waiting to pay the bills next year will allow her to use the expenses to offset the income and potentially avoid the hobby classification.

Question 17

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?

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Question 18

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?

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Question 19

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

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Question 20

Super Development Company purchased land in the current year from Riverside Chemicals,Inc. The land was contaminated with harmful pollutants,so Super Development paid $1,000,000 to remove the contaminants. What tax issue(s)should be considered before Super files its current year tax return?

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Quiz 12: Deductions and Losses