Deck 22: Deductions and Losses

Question 1

Individuals are generally allowed to deduct the greater of the standard deduction or itemized deductions.

Answer 1

True

Question 2

Adjusted gross income (AGI)is the basis for a number of phase-outs of deductions.

Answer 2

True

Question 3

Deductions for AGI may be located

A)Schedule 1 of Form 1040.
B)on Schedule C as a deduction.
C)on Schedule E as a deduction.
D)All of the above are true.

Answer 3

D

Question 4

In 2019,Sean,who is single and age 44,received $55,000 of gross income and had $5,000 of deductions for AGI and $5,600 of itemized deductions.Sean's taxable income is

A)$37,800.
B)$43,000.
C)$44,400.
D)none of the above.

Question 5

Deductions for adjusted gross income include the amounts paid for all of the following except

A)one-half of self employment tax.
B)home mortgage interest.
C)student loan interest.
D)contributions to a Health Savings Account.

Question 6

A single taxpayer has adjusted gross income of $325,000 and has total itemized deductions in various categories totaling $20,000.The taxpayer discovers some additional deductions for AGI.The extra deductions can not affect his itemized deductions.

Question 7

Generally,expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.

Question 8

Charles is a single person,age 35,with no dependents.In 2019,Charles has gross income of $75,000 from his sole proprietorship.Charles also incurs $80,000 of deductible business expenses in connection with his proprietorship.He has interest and dividend income of $22,000.Charles has $7,000 of itemized deductions.Charles's taxable income is

A)$4,800.
B)$10,000.
C)$17,000.
D)none of the above.

Question 9

Generally,deductions for adjusted gross income on an individual's tax return include all the following types of expenses except those

A)incurred in gambling activities.
B)incurred in a trade or business.
C)incurred in the production of rent income.
D)incurred in the production of royalty income.

Question 10

A deduction will be allowed for an expenditure unless the Internal Revenue Code specifically disallows it.

Question 11

According to the tax formula,individuals can deduct the greater of for AGI deductions or from AGI deductions.

Question 12

Deductions for adjusted gross income include all of the following except

A)contributions to certain retirement plan arrangements.
B)professional fees and supplies paid by elementary and high school teachers.
C)expenses attributable to production of rental income.
D)unreimbursed employee business expenses.

Question 13

Itemized deductions are deductions for AGI.

Question 14

Fees paid to prepare a taxpayer's Schedule C of the tax return (Profit or Loss from Business)are for AGI deductions.

Question 15

Self-employed individuals may claim,as a deduction for adjusted gross income,50 percent of their

A)traditional IRA contributions.
B)disability insurance premiums.
C)health insurance premiums.
D)self-employment tax.

Question 16

Expenses incurred in a trade or business generally are deductions for AGI.

Question 17

Assume Congress wishes to encourage healthy eating and is considering a deduction for broccoli purchases.In order to maximize the value of this tax deduction for taxpayers,Congress should provide for a(n)

A)itemized deduction.
B)deduction for AGI.
C)deduction from AGI.
D)All of the above would provide the same tax savings to taxpayers.

Question 18

Expenses incurred in connection with conducting a trade or business activity or in connection with production of income are generally deductible,but personal expenses are generally not deductible.

Question 19

A change to adjusted gross income cannot affect a taxpayer's itemized deductions.

Question 20

Liz,who is single in 2019,lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate.Liz had the following items of income and expense during the current year. Income:
$\begin{array}{|l|c|}\hline\text { Gross salary and commissions from Ace }\\\text { Corporation }&\$50,000\\\hline \text { Rent received from tenant in Liz's rental house } & 13,000 \\\hline \text { Dividends received on her portfolio of stocks } & 5,000 \\\hline\end{array}$ Expenses:
$$\begin{array} { | l | l | } \hline\text { Interest and property taxes on her own home } & 9,000 \\\hline \text { Taxes, interest and repair expenses on rental house } & 3,500 \\\hline \text { Depreciation expense on rental house } & 2,300 \\\hline\end{array}$$ What is her adjusted gross income for the year?

A)$64,300
B)$53,200
C)$62,200
D)$68,000

Question 21

Which of the following is not required for an expenditure to be deductible as a business or investment expense?

A)recurring in nature
B)ordinary and necessary
C)reasonable in amount
D)incurred by the taxpayer

Question 22

Laura,the controlling shareholder and an employee of Southtown Corporation,receives an annual salary of $750,000.Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably sized corporations,the IRS contends that Laura's salary should be no higher than $600,000.The Court upheld the IRS's position.As a result,which of the following is true?

A)$600,000 is deductible by the corporation; $600,000 is taxable to Laura.
B)$600,000 is deductible by the corporation; $750,000 is taxable to Laura.
C)$750,000 is deductible by the corporation; $750,000 is taxable to Laura.
D)$750,000 is deductible by the corporation; $600,000 is taxable to Laura.

Question 23

Mark and his brother,Rick,each own farms.Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle.Mark purchases $2,000 of feed and gives Rick one-half of the feed.Mark tells Rick that there is no need to repay him and to consider the feed a gift.Which of the following statements is true?

A)Mark can deduct $2,000 for the feed.
B)Mark can deduct $1,000 for the feed.
C)Rick must report $1,000 as income.
D)None of the above is true.

Question 24

Various criteria will disqualify the deduction of a business or investment related expenditure.Which of the following criteria will not disqualify a business or investment expenditure?

A)Capital expenditure
B)Expenses related to tax-exempt income
C)Expenses are not incurred annually.
D)Expenses are illegal or in violation of public policy.

Question 25

During the current year,Martin purchases undeveloped land as an investment.Martin intends to rent the land as pastureland and hopefully sell it later for a profit.In the current year,Martin receives no rent but he does pay taxes of $2,800,mortgage interest of $900 and liability insurance of $500.How much of these expenses can Martin deduct (before any limitations)on his current tax return?

A)$0
B)$1,400
C)$3,700
D)$4,200

Question 26

An expense is considered necessary if it is "appropriate and helpful" in the taxpayer's business.

Question 27

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

Question 28

In order for an expense to be ordinary,it must be reasonable in amount and it must bear a reasonable and proximate relationship to the income-producing activity or property.

Question 29

FIFO Corporation,a public-traded corporation,pays its CFO a basic salary of $900,000 and a $500,000 bonus awarded for exceptional service.Her compensation package is considered reasonable compensation when compared to other similar corporations and her level of responsibilities.FIFO can deduct

A)$500,000.
B)$900,000.
C)$1,000,000.
D)$1,400,000.

Question 30

A sole proprietor paid legal fees in connection with the acquisition of a building that he uses in his business.The sole proprietor can deduct the legal fees for AGI.

Question 31

Leigh pays the following legal and accounting fees during the year: $\begin{array}{|l|c|}\hline \text { Legal fees in connection with a contract dispute in her trade or business } & \$ 8,800 \\\hline \text { Legal fees related to resolving a tax deficiency related to business } & 4,000 \\\hline \text { Tax return preparation fees: Allocable to Schedules A and B } & 1,000 \\\hline \text { Tax return preparation fees: Allocable to Schedule C } & 1,200 \\\hline \text { Legal fees incident to a divorce } &5,000 \\\hline\end{array}$ What is the total amount of her for AGI deduction for these fees?

A)$10,800
B)$14,000
C)$15,000
D)$20,000

Question 32

Carole owns 75% of Pet Foods,Inc.As CEO,Carole must travel extensively and does so on the company jet.In addition,she also uses the jet to take several personal vacations.Carole reports the value of the personal use of the jet,$40,000,as additional compensation.Which of the following is true in terms of the corporation?

A)The corporation includes $40,000 as miscellaneous income.
B)The $40,000 has no impact on the corporation's income tax.
C)The corporation takes a deduction of $40,000 for compensation expense.
D)The corporation takes a deduction of $40,000 for dividend expense.

Question 33

Maria pays the following legal and accounting fees during the year: $$\begin{array} {| l | r | } \hline \text { Legal fees in connection with ongoing operations of a trade or business } & \$ 4,000 \\\hline \text { Legal fees related to purchase of personal residence } & 2,600 \\\hline \text { Legal fees related to tax deficiency related to Schedule A itemized } & \\\text { deductions } & 500 \\\hline \text { Tax return preparation fees: Allocable to preparation of Schedule C } & 2,000 \\\hline \text { Tax return preparation fees: Allocable to preparation of remainder of } & \\\text { return } & 2,100\\\hline\end{array}$$ What is the total amount of her for AGI deduction for these fees?

A)$4,000
B)$6,000
C)$8,100
D)$11,200

Question 34

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

Question 35

One of the criteria to be satisfied in order for a business to deduct an expense is that the expense be "necessary." In applying this standard,case law has determined that necessary means

A)indispensable if the business is to succeed.
B)mandated by law.
C)appropriate and helpful to the business.
D)none of the above.

Question 36

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

Question 37

Pamela was an officer in Green Restaurant which subsequently went bankrupt.Pamela started a new restaurant and,to establish goodwill,paid off the debts of $100,000 of Green Restaurant.She was under no obligation to do so.The $100,000 is

A)deductible currently as an itemized deduction.
B)capitalized because the expenses are not ordinary.
C)deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses.
D)none of the above.

Question 38

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.

Question 39

To be tax deductible by an accrual-basis taxpayer,an expense must be all of the following except

A)ordinary and necessary.
B)paid in cash.
C)reasonable in amount.
D)an expense of the taxpayer.

Question 40

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

Question 41

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

A)$0.
B)$200,000.
C)$330,000.
D)$380,000.

Question 42

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.

A)Toni must capitalize and amortize the Northtown investigation costs,but can immediately deduct the Southtown investigation costs.
B)Toni must capitalize and amortize the Northtown investigation costs,but the Southtown investigation costs are not deductible at all.
C)Both the Northtown and the Southtown investigation costs must be capitalized and amortized.
D)Both the Northtown and the Southtown investigation costs are currently deductible.

Question 43

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

A)Businesses with current year gross receipts exceeding $10 million are subject to this limitation.
B)Businesses will add back depreciation and amortization deductions to taxable income in order to calculate the maximum interest deduction.
C)The interest expense deduction is limited to business interest income plus 30% of adjusted taxable income.
D)All of the above statements are accurate statements with respect to calculating the interest expense limitation.

Question 44

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

Question 45

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?

A)$400,000
B)$1,200,000
C)$2,000,000
D)$6,000,000

Question 46

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?

A)$0
B)$5,000
C)$5,600
D)$6,800

Question 47

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?

A)$0
B)$100,000
C)$500,000
D)$600,000

Question 48

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?

A)$0
B)$5,000
C)$5,100
D)$8,600

Question 49

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?

A)$0
B)$5,000
C)$5,600
D)$6,800

Question 50

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.

Question 51

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?

A)$0
B)$100,000
C)$500,000
D)$1,000,000

Question 52

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.

Question 53

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

A)The expenditure improves the property,adding to the value of the property.
B)The expenditure provides a betterment,adding to the value of the property.
C)The expenditure restores the property.
D)All of the above

Question 54

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?

A)Capitalize $3,500 each year.
B)Deduct $3,500 each year.
C)Capitalize $3,500 in 2019 and deduct $3,500 in 2020.
D)Either B or C is acceptable.

Question 55

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?

A)$540,000
B)$900,000
C)$1,500,000
D)$1,800,000

Question 56

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?

A)$115,000
B)$123,000
C)$108,000
D)$144,000

Question 57

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?

A)$18,000 for AGI
B)$18,000 from AGI
C)$9,000 for AGI
D)$9,000 from AGI

Question 58

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?

A)Ivan must capitalize the property taxes on both properties each year if an election is made.
B)Ivan must deduct the property taxes on both properties each year.
C)Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year.
D)Ivan may elect to capitalize the property taxes for the properties in one year and then deduct the property taxes on the properties the next year.

Question 59

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.

Question 60

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

Question 61

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

A)The liability must be paid.
B)The existence of a liability must be established.
C)The amount of the liability is determined with reasonable accuracy.
D)The services must actually be provided.

Question 62

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?

A)$350
B)$1,750
C)$5,950
D)$12,600

Question 63

An accrual-basis taxpayer may elect to accrue real property taxes ratably over the period to which the taxes relate.

Question 64

Expenses paid with a credit card are deductible at the time a cash-basis taxpayer pays for the charge.

Question 65

Accrual-basis taxpayers are allowed to deduct expenses when they meet either the economic performance test or the all-events test.

Question 66

What must a taxpayer do to properly document a deductible travel or client business meal expense?

Question 67

Which of the following statements is false?

A)A tax deduction is allowed to a taxpayer for estimated warranty expense.
B)A tax deduction is allowed in association with a warranty only in the year in which warranty work is performed.
C)A tax deduction is allowed for a contested amount if the amount is paid prior to final settlement.
D)No tax deduction is allowed to an accrual-basis taxpayer for the amount of a down payment for a non-recurring expense when the work is to be performed in a subsequent period.

Question 68

A partnership is owned by three individuals.The partnership generated $15 million of gross receipts per year on average from sales of its inventory.While the inventory is a material income-producing factor,the partnership records inventories as incidental supplies in its internal accounting.For tax purposes,the partnership will not be allowed the cash method of accounting.

Question 69

Points paid in connection with the purchase of a principal residence may be deducted in the year paid.

Question 70

Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.

Question 71

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?

A)$0
B)$160
C)$3,200
D)$6,400

Question 72

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?

A)$0
B)$100
C)$240
D)$4,800

Question 73

Paul,a business consultant,regularly takes clients and potential clients out to dinner.In order to deduct these expenses,Paul must maintain records substantiating all of the following except

A)the time and place of the dinners.
B)the business relationship with the person invited.
C)the business purpose of the dinners.
D)All of the above information must be substantiated in order to deduct the entertainment costs.

Question 74

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?

A)Yes,she can deduct the full amount of the refinanced loan points in the year of sale because none of these points have been previously deducted.
B)Yes,she can deduct the unamortized balance of the refinanced loan points in the year of sale.
C)No,the full amount of the refinanced loan points were already deducted in the year the home mortgage was refinanced.
D)No,points paid to refinance a home mortgage are never deductible.

Question 75

Doug,a self-employed consultant,has been a firm believer in maintaining a paperless office.Unfortunately,he recently lost all of his business records in a ransomware attack,and his backup system was also compromised.Which of the following tax doctrines and cases should Doug investigate to better understand substantiation requirements for business expenses?

A)the tax benefit rule
B)the Corn Products doctrine
C)the Cohan rule
D)the Arkansas Best doctrine

Question 76

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

A)$300 next year.
B)$300 this year.
C)$25 this year and $275 next year.
D)nothing since the note is "noninterest-bearing."

Question 77

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?

A)$0
B)$160
C)$3,200
D)$6,400

Question 78

A small business uses the accrual method of accounting for its financial statements.It must also use the accrual method for computing taxable income.

Question 79

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?

A)$100
B)$600
C)$700
D)The amounts must be capitalized and charged to expense as used.

Question 80

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

A)purchase
B)refinance
C)construction
D)improvement