Deck 5: Business Deductions

Question 1

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.

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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 10

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

Question 11

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 12

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 13

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

Question 14

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

Question 15

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

Question 16

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 17

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 18

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 19

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

Question 20

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 21

In the current year, 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 22

Property which is classified as personalty may be depreciated.

Question 23

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 24

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

Question 25

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

Question 26

In tax planning for charitable contributions, a current year's contribution might have to be deferred to a later year in order to deduct a contribution carryover amount.

Question 27

The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and Board of Directors.

Question 28

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 29

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

Question 30

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 31

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2017 of $5,000.In 2018, Heron made a further charitable contribution of $20,000.Heron's 2018 deduction is limited to $15,000 10% of taxable income).The 2018 contribution must be applied first against the $15,000 limitation.

Question 32

Antiques may be eligible for cost recovery if they are used in a trade or business.

Question 33

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

Question 34

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

Question 35

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 five years ago for $10,000.Oriole's charitable contribution deduction is $30,000 ignoring the taxable income limitation).

Question 36

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 37

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 38

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

Question 39

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 40

The key date for calculating cost recovery is the date the asset is placed in service.

Question 41

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 42

All personal property placed in service in 2018 and used in a trade or business qualifies for additional first-year depreciation.

Question 43

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

Question 44

Taxpayers may elect to use the straight-line method under MACRS for personalty.

Question 45

For personal property placed in service in 2018, the § 179 maximum deduction is limited to $1,000,000.

Question 46

The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.

Question 47

Motel buildings have a cost recovery period of 27.5 years.

Question 48

The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition.

Question 49

The § 179 deduction can exceed $1,000,000 in 2018 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.

Question 50

Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.

Question 51

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

Question 52

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

Question 53

The cost recovery period for 3-year class property is 4 years.

Question 54

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 55

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

Question 56

Under the MACRS straight-line election for personalty, only the half-year convention is applicable.

Question 57

Land improvements are generally not eligible for cost recovery.

Question 58

Property used for the production of income is not eligible for § 179 expensing.

Question 59

The luxury auto cost recovery limits applies to all automobiles.

Question 60

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 61

All listed property is subject to the substantiation requirements of § 274.

Question 62

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

Question 63

For a new car that is used predominantly in business, the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation.

Question 64

Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.

Question 65

If an automobile is placed in service in 2018, the limitation for cost recovery in 2020 will be based on the cost recovery limits for the year 2018.

Question 66

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 67

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

Question 68

A taxpayer must use the alternative depreciation system ADS) to compute depreciation for earnings and profits.

Question 69

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

Question 70

MACRS depreciation is used to compute earnings and profits.

Question 71

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

Question 72

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

Question 73

If startup expenses total $53,000, $51,000 of those costs are amortized over 180 months.

Question 74

The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used.

Question 75

Intangible drilling costs must be capitalized and recovered through depletion.

Question 76

A used $35,000 automobile that is used 100% for business is placed in service in 2018.If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured.

Question 77

The amortization period for $58,000 of startup expenses is 180 months.

Question 78

A purchased trademark is a § 197 intangible.

Question 79

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

Question 80

For real property, the ADS convention is the mid-month convention.