Deck 5: Business Deductions

Question 1

Isabella owns two business entities.She may be able to use the cash method for one and the accrual method for the other.

Answer 1

True

Question 2

For a taxpayer who is engaged in a trade or business,the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.

Answer 2

False

Question 3

The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of a shareholder-employee's gross income,but results in an increase in the taxable income of the corporation.

Answer 3

True

Question 4

Generally,a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.

Question 5

An expense need not be recurring in order to be "ordinary."

Question 6

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

Question 7

LD Partnership,a cash basis taxpayer,purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building.The gross receipts of the partnership are less than $100,000.LD must capitalize the $50,000 paid for the land,but can deduct the $150,000 paid for the building in the current tax year.

Question 8

If a taxpayer operates an illegal business,no deductions are permitted.

Question 9

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Question 10

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Question 11

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes,but is not allowed for a cash method taxpayer.

Question 12

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

Question 13

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense.If the same amount is paid to the CEO of IBM,only $1 million is deductible.

Question 14

Fines and penalties paid for violations of the law (e.g.,illegal dumping of hazardous waste)are deductible only if they relate to a trade or business.

Question 15

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

Question 16

Aaron,a shareholder-employee of Pigeon,Inc.,receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.

Question 17

Two-thirds of treble damage payments under the antitrust law are not deductible.

Question 18

None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.

Question 19

Jacques,who is not a U.S.citizen,makes a contribution to the campaign of a candidate for governor.Cassie,a U.S.citizen,also makes a contribution to the same campaign fund.If contributions by noncitizens are illegal under state law,the contribution by Cassie is deductible,while that by Jacques is not.

Question 20

Ordinary and necessary business expenses,other than cost of goods sold,of an illegal drug trafficking business do not reduce taxable income.

Question 21

Under MACRS,if the mid-quarter convention is applicable,all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.

Question 22

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

Question 23

Crow Corporation,a C corporation,donated scientific property (basis of $30,000,fair market value of $50,000)to State University,a qualified charitable organization,to be used in research.Crow had held the property for four months as inventory.Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

Question 24

Research and experimental expenditures do not include the cost of consumer surveys.

Question 25

Purchased goodwill must be capitalized,but can be amortized over a 60-month period.

Question 26

In the current year,Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum,a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $10,000.Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Question 27

If an election is made to defer deduction of research expenditures,the amortization period is based on the expected life of the research project if less than 60 months.

Question 28

If more than 40% of the value of property,other than real property,is placed in service during the last quarter,all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

Question 29

For purposes of the § 267 loss disallowance provision,a taxpayer's aunt is a related party.

Question 30

For a corporation,the domestic production activities deduction is equal to 9% of the lesser of (1)qualified production activities income or (2)taxable income.However,the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

Question 31

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

Question 32

The cost of depreciable property is not a research and experimental expenditure.

Question 33

Property which is classified as personalty may be depreciated.

Question 34

The limit for the domestic production activities deduction (DPAD)uses all W-2 wages paid to employees by the taxpayer during the tax year.

Question 35

All personal property placed in service in 2013 and used in a trade or business qualifies for additional first-year depreciation.

Question 36

For tax years beginning in 2013,the domestic production activities deduction (DPAD)for a sole proprietor is calculated by multiplying 9% times adjusted gross income.

Question 37

If qualified production activities income (QPAI)cannot be used in the calculation of the domestic production activities deduction in 2013 because of the taxable income limitation,the product of the amount not allowed multiplied by 9% can be carried over for 5 years.

Question 38

Marge sells land to her adult son,Jason,for its $20,000 appraised value.Her adjusted basis for the land is $25,000.Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge).

Question 39

On December 20,2013,the directors of Quail Corporation (an accrual basis,calendar year taxpayer)authorized a cash donation of $5,000 to the American Cancer Society,a qualified charity.The payment,which is made on April 10,2014,may be claimed as a deduction for tax year 2013.

Question 40

Heron Corporation,a calendar year C corporation,had an excess charitable contribution for 2012 of $5,000.In 2013,Heron made a further charitable contribution of $20,000.Heron's 2013 deduction is limited to $15,000 (10% of taxable income).The current year's contribution must be applied first against the $15,000 limitation.

Question 41

During 2012,the first year of operations,Silver,Inc.,pays salaries of $175,000.At the end of the year,employees have earned salaries of $20,000,which are not paid by Silver until early in 2013.What is the amount of the deduction for salary expense?

A)If Silver uses the cash method,$175,000 in 2012 and $0 in 2013.
B)If Silver uses the cash method,$0 in 2012 and $195,000 in 2013.
C)If Silver uses the accrual method,$175,000 in 2012 and $20,000 in 2013.
D)If Silver uses the accrual method,$195,000 in 2012 and $0 in 2013.
E)None of the above is correct.

Question 42

In a farming business,if the uniform capitalization rules are not used,cost is recovered using the ADS straight-line method.

Question 43

The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years.

Question 44

The inclusion amount for a leased automobile is adjusted by a business usage percentage.

Question 45

Percentage depletion enables the taxpayer to recover more than the cost of an asset.

Question 46

Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.

Question 47

If a new car that is used predominantly in business is placed in service in 2013,the statutory dollar cost recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straight-line depreciation.

Question 48

Benita incurred a business expense on December 10,2013,which she charged on her bank credit card.She paid the credit card statement which included the charge on January 5,2014.Which of the following is correct?

A)If Benita is a cash method taxpayer,she cannot deduct the expense until 2014.
B)If Benita is an accrual method taxpayer,she can deduct the expense in 2013.
C)If Benita uses the accrual method,she can choose to deduct the expense in either 2013 or 2014.
D)Only b.and c.are correct.
E)a.,b.,and c.are correct.

Question 49

When lessor owned leasehold improvements are abandoned because of the termination of the lease,a loss can be taken for the unrecovered basis.

Question 50

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.

Question 51

Under the alternative depreciation system (ADS),the half-year convention must be used for personalty.

Question 52

Petal,Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2013,the following occur associated with bad debts. The amount of the deduction for bad debt expense for Petal for 2013 is:

A)$10,000.
B)$12,000.
C)$22,000.
D)$140,000.
E)None of the above.

Question 53

Goodwill associated with the acquisition of a business cannot be amortized.

Question 54

Paula is the sole shareholder of Violet,Inc.For 2013,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2013 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 decrease by $100,000 as a result of the IRS adjustment.
E)None of the above is correct.

Question 55

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.

Question 56

Which of the following is a required test for the deduction of a business expense?

A)Ordinary.
B)Necessary.
C)Reasonable.
D)All of the above.
E)None of the above.

Question 57

The basis of an asset on which $500,000 has been expensed under § 179 will be reduced by $500,000,even if $500,000 cannot be expensed in the current year because of the taxable income limitation.

Question 58

If a used $35,000 automobile used 100% for business in the first year (2013)fails the 50% business usage test in the second year,no cost recovery will be recaptured.

Question 59

Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.

Question 60

The § 179 deduction can exceed $500,000 in 2013 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.

Question 61

During the current year,Kingbird Corporation (a calendar year C corporation)had the following income and expenses: On October 1,Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash (not included in any of the above items).Determine Kingbird's charitable contribution deduction for the current year.

A)$9,000.
B)$7,500.
C)$6,650.
D)$6,450.
E)None of the above.

Question 62

Which of the following legal expenses are deductible for AGI?

A)Incurred in connection with a trade or business.
B)Incurred in connection with rental or royalty property held for the production of income.
C)Incurred for tax advice relative to the preparation of an individual's income tax return.
D)Only a.and b.qualify.
E)a.,b.,and c.qualify.

Question 63

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.

Question 64

On January 2,2013,Fran acquires a business from Chuck.Among the assets purchased are the following intangibles: patent with a 7-year remaining life,a covenant not to compete for 10 years,and goodwill. Of the purchase price,$140,000 was paid for the patent and $60,000 for the covenant.The amount of the excess of the purchase price over the identifiable assets was $100,000.What is the amount of the amortization deduction for 2013?

A)$10,667.
B)$16,000.
C)$20,000.
D)$32,667.
E)None of the above.

Question 65

Which of the following is not a related party for constructive ownership purposes under § 267?

A)The taxpayer's aunt.
B)The taxpayer's brother.
C)The taxpayer's grandmother.
D)A corporation owned more than 50% by the taxpayer.
E)None of the above.

Question 66

Hippo,Inc.,a calendar year C corporation,manufactures golf gloves.For the current year,Hippo had taxable income (before DPAD)of $900,000,qualified domestic production activities income of $750,000,and W-2 wages related to qualified production activities income of $140,000.Hippo's domestic production activities deduction for the current year is:

A)$0.
B)$12,600.
C)$67,500.
D)$70,000.
E)None of the above.

Question 67

Nikeya sells land (adjusted basis of $120,000)to her adult son,Shamed,for its appraised value of $95,000.Which of the following statements is correct?

A)Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis).
B)Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).
C)If Shamed subsequently sells the land for $112,000,he has no recognized gain or loss.
D)Only a.and b.are correct.
E)a.,b.,and c.are correct.

Question 68

Which of the following must be capitalized by a business?

A)Replacement of a windshield of a business truck which was broken in an accident.
B)Repair of a roof of a building used in business.
C)Amount paid for a covenant not to compete.
D)Only b.and c.must be capitalized.
E)a.,b.,and c.can be expensed rather than capitalized.

Question 69

Rex,a cash basis calendar year taxpayer,runs a bingo operation which is illegal under state law.During 2013,a bill designated H.R.9 is introduced into the state legislature which,if enacted,would legitimize bingo games.In 2013,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.

Question 70

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.

Question 71

For a president of a publicly held corporation,which of the following are not subject to the $1 million limit on executive compensation?

A)Contribution to medical insurance plan.
B)Contribution to pension plan.
C)Premiums on group term life insurance of $50,000.
D)Only b.and c.are not subject to the limit.
E)a.,b.,and c.,are not subject to the limit.

Question 72

During the current year,Owl Corporation (a C corporation),a retailer of children's apparel,made the following donations to qualified charitable organizations. How much qualifies for the charitable contribution deduction?

A)$63,000.
B)$65,000.
C)$90,500.
D)$92,500.
E)None of the above.

Question 73

Which of the following may be deductible?

A)Bribes that relate to a U.S.business.
B)Fines paid for violations of the law.
C)Interest on a loan used in a hobby.
D)All of the above.
E)None of the above.

Question 74

In January,Lance sold stock with a cost basis of $26,000 to his brother,James,for $24,000,the fair market value of the stock on the date of sale.Five months later,James sold the same stock through his broker for $27,000.What is the tax effect of these transactions?

A)Disallowed loss to James of $2,000; gain to Lance of $1,000.
B)Disallowed loss to Lance of $2,000; gain to James of $3,000.
C)Deductible loss to Lance of $2,000; gain to James of $3,000.
D)Disallowed loss to Lance of $2,000; gain to James of $1,000.
E)None of the above.

Question 75

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 regardless of whether the business being investigated is acquired.
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.

Question 76

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.

Question 77

Regarding research and experimental expenditures,which of the following are not qualified expenditures?

A)Costs of ordinary testing of materials.
B)Costs to develop a plant process.
C)Costs of developing a formula.
D)Depreciation on a building used for research.
E)All of the above are qualified expenditures.

Question 78

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

A)$0.
B)$250.
C)$600.
D)$1,425.
E)None of the above.

Question 79

In the current year,Plum Corporation,a computer manufacturer,donated 100 laptop computers to a local university (a qualified educational organization).The computers were constructed by Plum earlier this year,and the university will use the computers for research and research training.Plum's basis in the computers is $35,000,and their fair market value is $120,000.What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation)?

A)$35,000.
B)$70,000.
C)$77,500.
D)$85,000.
E)$120,000.

Question 80

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2013,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 2013.
C)Expense $9,000 for 2013 and capitalize $14,000.
D)Capitalize $23,000.
E)None of the above.