Deck 6: Deductions and Losses: in General

Question 1

Deductions are allowed unless a specific provision in the tax law provides otherwise.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income producing factor in the business.

Question 6

Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

Question 7

Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from
AGI.

Question 8

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Question 9

In 2018, unreimbursed employment related expenses are classified as deductions for AGI.

Question 10

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 11

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

Question 12

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 13

Investment related expenses, such as paying a fee to an investment manager, generally are deductions from
adjusted gross income in 2018.

Question 14

Alice incurs qualified moving expenses of $12,000 in 2018. If she is not reimbursed by her employer, the deduction is classified as a deduction for AGI.

Question 15

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

Question 16

The income of a sole proprietorship is reported on Schedule C Profit or Loss from Business).

Question 17

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.

Question 18

Under the "twelve month rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

Question 19

The Code does not specifically define what constitutes a trade or business.

Question 20

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

Question 21

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

Question 22

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.

Question 23

A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby related expenses.

Question 24

Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 "grease" payment to a
U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan's employer.

Question 25

If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions.

Question 26

Fines and penalties paid for violations of the law

Question 27

The cost of legal advice associated with the preparation of an individual's Federal income tax return that is paid in 2018 is not deductible because it is a personal expense.

Question 28

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

Question 29

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

Question 30

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 31

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 32

Legal expenses incurred in connection with rental property are deductions from AGI.

Question 33

The legal cost of having a will prepared is not deductible.

Question 34

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 35

If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.

Question 36

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Question 37

All domestic bribes i.e., to a U.S. official) are disallowed as deductions.

Question 38

In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption i.e., profit in at least 3 out of 5 years) ensures treatment as a business.

Question 39

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 40

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

Question 41

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

Question 42

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 43

If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense.

Question 44

Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000. Beulah converts the property to rental use this year. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.

Question 45

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 46

Trade or business expenses of a self-employed taxpayer should be treated as:

A) Deductible for AGI on Schedule E.
B) A deduction from AGI.
C) Deductible for AGI on Schedule C.
D) An itemized deduction if not reimbursed.
E) None of the above.

Question 47

Walt wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them.

Question 48

A vacation home at the beach which is rented for 200 days and used personally for 16 days is classified in the personal/rental use category.

Question 49

Which of the following can be claimed as a deduction for AGI?

A) Personal casualty losses.
B) Investment interest expenses.
C) Medical expenses.
D) Property taxes on personal use real estate.
E) None of the above.

Question 50

Which of the following is a deduction for AGI?

A) Contribution to a traditional IRA.
B) Roof repairs to a personal use home.
C) Safe deposit box rental fee in which stock certificates are stored.
D) Property tax on personal residence.
E) All of the above.

Question 51

If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.

Question 52

If a vacation home is classified as primarily personal use i.e., rented for fewer than 15 days), none of the related expenses can be deducted.

Question 53

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

Question 54

If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.

Question 55

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.

Question 56

If a publicly-traded corporation hires a new CEO in 2018 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000.

Question 57

An advance payment received in June 2018 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

Question 58

If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.

Question 59

Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.

Question 60

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

Question 61

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 62

Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: $$\begin{array} { l r } \text { Mortgage interest } & \$ 9,000 \\\text { Real estate taxes } & 3,000 \\\text { Utilities } & 2,000 \\\text { Maintenance } & 1,000 \\\text { Insurance } & 500 \\\text { Depreciation (rental part) } & 4,000\end{array}$$ Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

A) $0.
B) $6,000.
C) $8,000.
D) $12,000.
E) None of the above.

Question 63

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2018, 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 2018.
C) Expense $9,000 for 2018 and capitalize $14,000.
D) Capitalize $23,000.
E) None of the above.

Question 64

Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: $\begin{array}{llcc} \text {General representation in obtaining the divorce } & \$ 1,500 \\ \text { Services in obtaining custody of the child } &900\\ \text { Services in settlement of martial property } &600\\ \text { Determining the tax consequences of: } &\\ \text { Dependency deduction for child } &700\\ \text { Tax Consequences of property settlement} &1,300\\\end{array}$
Of the $5,000 Velma pays to her attorney in 2018, the amount she may deduct as an itemized deduction is:

A) $0.
B) $700.
C) $2,000.
D) $5,000.
E) None of the above.

Question 65

Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?

A) Whether the activity is enjoyed by the taxpayer.
B) The expertise of the taxpayers or their advisers.
C) The time and effort expended.
D) The relationship of profits earned and losses incurred.
E) All of the above are relevant factors.

Question 66

Which of the following may be deductible in 2018?

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 67

On January 2, 2018, 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 2018?

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

Question 68

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 69

Andrew, who operates a laundry business, incurred the following expenses during the year. ∙ Parking ticket of $250 for one of his delivery vans that parked illegally.
∙ Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
∙ DUI ticket of $500 while returning from the rock concert.
∙ Attorney's fee of $600 associated with the DUI ticket.
What amount can Andrew deduct for these expenses?

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

Question 70

Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced his practice on February 1, 2018. In order to guarantee no rent increases during an 18-month period, he signed an 18- month lease and prepaid the $90,000 on February 1, 2018. How much can Taylor deduct as rent expense for 2018?

Question 71

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 72

Melba incurred the following expenses for her dependent daughter during the current year:
$\begin{array}{lr} \text { Payment of principal on daughter's automobile loan} &\$ 3,600 \\ \text {Payment of interest on above loan } &2,900 \\ \text { Payment of daughter's property taxes } &1,800 \\ \text {Payment of principal on daughter's personal residence loan } &2,800 \\ \text { Payment of interest on daughter's personal residence loan } &7,000\end{array}$
How much may Melba deduct in computing her itemized deductions?

A) $\$ 0$ .
B) $\$ 8,800$
C) $\$ 11,700$ .
D) $\$ 18,100$
E) None of the above.

Question 73

Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0. Based on this policy, Robin and Jeff each receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.

Question 74

Which of the following is not deductible in 2018?

A) Moving expenses in excess of reimbursement.
B) Tax return preparation fees of an individual.
C) Expenses incurred associated with investments in stocks and bonds.
D) Allowable hobby expenses in excess of hobby income.
E) All of the above.

Question 75

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 76

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 77

During 2017, 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 2018. What is the amount of the deduction for salary expense?

A) If Silver uses the cash method, $175,000 in 2017 and $0 in 2018.
B) If Silver uses the cash method, $0 in 2017 and $195,000 in 2018.
C) If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018.
D) If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018.
E) None of the above is correct.

Question 78

Paula is the sole shareholder of Violet, Inc. For 2018, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2018 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 79

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 80

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) 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.