Question 1

Petal,Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2012,the following occur associated with bad debts.  The amount of the deduction for bad debt expense for Petal for 2012 is:
A) $13,000.
B) $14,000.
C) $27,000.
D) $35,000.
E) None of the above.

Accepted Answer

The answer of Petal,Inc.is an accrual basis taxpayer.Petal uses the...

Question 2

Andrew,who operates a laundry business,incurred the following expenses during the year.  What amount can Andrew deduct for these expenses?
A) $0.
B) $50.
C) $150.
D) $550.
E) None of the above.

Accepted Answer

The answer of Andrew,who operates a laundry business,incurred the following...

Question 3

Rex,a cash basis calendar year taxpayer,runs a bingo operation which is illegal under state law.During 2012,a bill designated H.R.9 is introduced into the state legislature which,if enacted,would legitimize bingo games.In 2012,Rex had the following expenses:  Of these expenditures,Rex may deduct:
A) $247,000.
B) $250,000.
C) $258,000.
D) $282,000.
E) None of the above.

Accepted Answer

The answer of Rex,a cash basis calendar year taxpayer,runs a...

Question 4

Which of the following expenses associated with the illegal sale of whiskey (i.e.,bootlegging)can be deducted?
A) Cost of goods sold.
B) Advertising.
C) Cost of delivery.
D) Only a. and c.
E) a., b., and c.

Accepted Answer

The answer of Which of the following expenses associated with...

Question 5

Terry and Jim are both involved in operating illegal businesses.Terry operates a gambling business and Jim operates a drug running business.Both businesses have gross revenues of $500,000.The businesses incur the following expenses.  Which of the following statements is correct?
A) Neither Terry nor Jim can deduct any of the above items in calculating the business profit.
B) Terry should report profit from his business of $250,000.
C) Jim should report profit from his business of $500,000.
D) Jim should report profit from his business of $250,000.
E) None of the above.

Accepted Answer

The answer of Terry and Jim are both involved in...

Question 6

Which of the following is not a "trade or business" expense?
A) Interest on business indebtedness.
B) Property taxes on business property.
C) Parking ticket paid on business auto.
D) Depreciation on business property.
E) All of the above are "trade or business" expenses.

Accepted Answer

Parking tickets paid on a business auto are considered fines and penalties, which are specifically excluded from being deductible as a business expense. The other options listed, interest on business debt, property taxes on business property, and depreciation on business property, are all considered legitimate trade or business expenses.

Question 7

Which of the following cannot be deducted as a § 162 business expense?
A) Expenses of investing in rental property.
B) Charitable contributions made by a sole proprietorship.
C) Fines and penalties.
D) Only a. and c. cannot.
E) a., b., and c. cannot.

Accepted Answer

Expenses of investing in rental property are not deductible as a §162 business expense because rental income is considered passive income. Charitable contributions made by a sole proprietorship are not deductible as a §162 business expense because they are considered personal expenses. Fines and penalties are not deductible as a §162 business expense because they are a result of a violation of the law.

Question 8

Benita incurred a business expense on December 10,2012,which she charged on her bank credit card.She paid the credit card statement which included the charge on January 5,2013.Which of the following is correct?
A) If Benita is a cash method taxpayer, she cannot deduct the expense until 2013.
B) If Benita is an accrual method taxpayer, she can deduct the expense in 2012.
C) If Benita uses the accrual method, she can choose to deduct the expense in either 2012 or 2013.
D) Only b. and c. are correct.
E) a., b., and c. are correct.

Accepted Answer

The answer of Benita incurred a business expense on December...

Question 9

Which of the following are deductions for AGI?
A) Mortgage interest on a personal residence.
B) Property taxes on a personal residence.
C) Mortgage interest on a building used in a business.
D) Fines and penalties incurred in a trade or business.
E) None of the above.

Accepted Answer

Only mortgage interest on a building used in a business is considered a deduction for AGI. Mortgage interest on a personal residence and property taxes on a personal residence are deductions from taxable income (itemized deductions). Fines and penalties incurred in a trade or business are not deductible.

Question 10

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2012,she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia.She acquires the South Carolina operations,but not the outlets in Georgia.As to these expenses,Iris should:
A) Capitalize $14,000 and not deduct $9,000.
B) Expense $23,000 for 2012.
C) Expense $9,000 for 2012 and capitalize $14,000.
D) Capitalize $23,000.
E) None of the above.

Accepted Answer

The answer of Iris,a calendar year cash basis taxpayer,owns and...

Question 11

Tommy,an automobile mechanic employed by an auto dealership,is considering opening a fast food franchise.If Tommy decides not to acquire the fast food franchise,any investigation expenses are:
A) A deduction for AGI.
B) A deduction from AGI, subject to the 2 percent floor.
C) A deduction from AGI, not subject to the 2 percent floor.
D) Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
E) Not deductible.

Accepted Answer

Investigation expenses for a potential new business venture are generally not deductible according to IRS guidelines.

Question 12

Vera is the CEO of Brunettes,a publicly held corporation.For the year,she receives a salary of $800,000,a bonus of $400,000,and contributions to her retirement plan of $45,000.The bonus was awarded at the December board meeting based on Vera's threat to accept a better paying job with a competitor.What amount may Brunettes deduct?
A) $842,000.
B) $1,045,000.
C) $1,200,000.
D) $1,245,000.
E) None of the above.

Accepted Answer

Brunettes may deduct the salary of $800,000 and the retirement plan contributions of $45,000 as reasonable compensation for Vera's services. The bonus of $400,000 may also be deducted if it was paid with a reasonable expectation of benefiting the corporation. The fact that it was awarded based on Vera's threat to accept a better paying job with a competitor does not necessarily invalidate its deductibility. Therefore, the total amount that Brunettes may deduct is $1,045,000.

Question 13

Payments by a cash basis taxpayer of capital expenditures:
A) Must be expensed at the time of payment.
B) Must be expensed by the end of the first year after the asset is acquired.
C) Must be deducted over the actual or statutory life of the asset.
D) Can be deducted in the year the taxpayer chooses.
E) None of the above.

Accepted Answer

The answer of Payments by a cash basis taxpayer of...

Question 14

Which of the following is a deduction from AGI (itemized deduction)?
A) Contribution to a traditional IRA.
B) Roof repairs to a rental home.
C) Safe deposit box rental fee in which stock certificates are stored.
D) Trade or business expense.
E) None of the above.

Accepted Answer

The answer of Which of the following is a deduction...

Question 15

Which of the following is deductible as a trade or business expense?
A) A city coroner contributes to the mayor's reelection campaign fund.
B) Illegal bribes and kickbacks paid to a Federal government employee by a corporate executive.
C) Two-thirds of treble damage payments.
D) Fines and penalties paid by a trucking firm for excessive weight and speeding.
E) None of the above.

Accepted Answer

The answer of Which of the following is deductible as...

Question 16

Which of the following statements is correct in connection with the investigation of a business?
A) If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned.
B) If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business.
C) That business must be related to the taxpayer's present business for any expense ever to be deductible.
D) Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized.
E) None of the above.

Accepted Answer

According to the IRS, if a taxpayer acquires or starts a new business in a similar field as their existing business, they may be able to immediately deduct the expenses incurred during the investigation of the new business. This is known as the "same-activity" standard. Option A, C, and D are incorrect statements regarding the deductibility of business investigation expenses.

Question 17

Paula is the sole shareholder of Violet,Inc.For 2012,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2012 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?
A) Paula's gross income will increase by $100,000 as a result of the IRS adjustment.
B) Violet's taxable income will not be affected by the IRS adjustment.
C) Paula's gross income will decrease by $100,000 as a result of the IRS adjustment.
D) Violet's taxable income will increase by $100,000 as a result of the IRS adjustment.
E) None of the above is correct.

Accepted Answer

The answer of Paula is the sole shareholder of Violet,Inc.For...

Question 18

Tom operates an illegal drug-running operation and incurred the following expenses:  Which of the above amounts reduces his taxable income?
A) $0.
B) $160,000.
C) $279,000.
D) $324,000.
E) None of the above.

Accepted Answer

The answer of Tom operates an illegal drug-running operation and...

Question 19

Which of the following is incorrect?
A) Alimony is a deduction for AGI.
B) The expenses associated with royalty property are a deduction from AGI.
C) Contributions to a traditional IRA are a deduction for AGI.
D) Property taxes on taxpayer's personal residence are a deduction from AGI
E) All of the above are correct.

Accepted Answer

The answer of Which of the following is incorrect?
A) Alimony...

Question 20

Which of the following is correct?
A) A personal casualty loss is classified as a deduction from AGI.
B) Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
C) An expense associated with rental property is classified as a deduction from AGI.
D) Only a. and b. are correct.
E) a., b., and c., are correct.

Accepted Answer

Option A is correct as personal casualty losses are classified as deductions from AGI.
Option B is correct as real estate taxes on a taxpayer's personal residence are also classified as deductions from AGI.
Option C is incorrect as an expense associated with rental property is classified as a deduction for adjusted gross income (AGI) rather than from AGI. Thus only options A and B are correct.

Quiz 6: Deductions and Losses: in General

Petal,Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2012,the following occur associated with bad debts. The amount of the deduction for bad debt expense for Petal for 2012 is:

Andrew,who operates a laundry business,incurred the following expenses during the year. What amount can Andrew deduct for these expenses?

Rex,a cash basis calendar year taxpayer,runs a bingo operation which is illegal under state law.During 2012,a bill designated H.R.9 is introduced into the state legislature which,if enacted,would legitimize bingo games.In 2012,Rex had the following expenses: Of these expenditures,Rex may deduct:

Which of the following expenses associated with the illegal sale of whiskey (i.e.,bootlegging) can be deducted?

Terry and Jim are both involved in operating illegal businesses.Terry operates a gambling business and Jim operates a drug running business.Both businesses have gross revenues of $500,000.The businesses incur the following expenses. Which of the following statements is correct?

Which of the following is not a "trade or business" expense?

Which of the following cannot be deducted as a § 162 business expense?

Benita incurred a business expense on December 10,2012,which she charged on her bank credit card.She paid the credit card statement which included the charge on January 5,2013.Which of the following is correct?

Which of the following are deductions for AGI?

Tommy,an automobile mechanic employed by an auto dealership,is considering opening a fast food franchise.If Tommy decides not to acquire the fast food franchise,any investigation expenses are:

Payments by a cash basis taxpayer of capital expenditures:

Which of the following is a deduction from AGI (itemized deduction) ?

Which of the following is deductible as a trade or business expense?

Which of the following statements is correct in connection with the investigation of a business?

Paula is the sole shareholder of Violet,Inc.For 2012,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2012 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?

Tom operates an illegal drug-running operation and incurred the following expenses: Which of the above amounts reduces his taxable income?

Which of the following is incorrect?

Which of the following is correct?