Deck 6: Deductions and Losses: in General

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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

Question 5

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

Question 6

Alice incurs qualified moving expenses of $12,000 in 2019.If she is not reimbursed by her employer, the deduction is classified as a deduction for AGI.

Question 7

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 8

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 adjusted gross income (AGI) than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

Under the 12-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 16

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 17

Investment related expenses, such as paying a fee to an investment manager, generally are deductions from adjusted gross income in 2019.

Question 18

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

Question 19

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

Question 20

Unreimbursed employment related expenses are classified as deductions for AGI.

Question 21

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 22

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 23

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

Question 24

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

Question 25

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 26

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

Question 27

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

Question 28

The cost of legal advice associated with the preparation of an individual's Federal income tax return that is paid in
2019 is not deductible because it is a personal expense.

Question 29

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

Question 30

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 31

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 32

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

Question 33

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 34

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 three out of five years) ensures treatment as a business.

Question 35

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

Question 36

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 37

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

Question 38

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

Question 39

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 40

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 41

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 lossof Marge).

Question 42

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

Question 43

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 these.

Question 44

If a publicly traded corporation hires a new CEO in 2019 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000.

Question 45

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

Question 46

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 47

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

Question 48

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 49

Martha rents part of her personal residence in the summer for three 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 50

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 51

Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2019: $$\begin{array} { l r } \text { Salary from job } & \$ 90,000 \\\text { Alimony received from ex-wife } & 10,000 \\\text { Medical expenses } & 7,000\end{array}$$ Based on this information, Sammy has:

A)AGI of $90,000.
B)AGI of $95,000.
C)AGI of $99,500.
D)Deduction for medical expenses of $0.
E)None of these.

Question 52

Marsha is single, had gross income of $50,000, and incurred the following expenses: $$\begin{array} { l r } \text { Charitable contribution } & \$ 2,000 \\\text { Taxes and interest on home } & 7,000 \\\text { Legal fees incurred in a tax dispute } & 1,000 \\\text { Medical expenses } & 3,000 \\\text { Penalty on early withdrawal of savings } & 250\end{array}$$ Her AGI is:

A)$39,750.
B)$49,750.
C)$40,000.
D)$39,750
E)None of these.

Question 53

Al is single, age 60, and has gross income of $140,000.His deductible expenses are as follows: $$\begin{array} { l r } \text { Alimony(divorce finalized in 2017) } & \$ 20,000 \\\text { Charitable contributions } & 4,000 \\\text { Contribution to a traditional IRA } & 5,500 \\\text { Expenses paid on rental property } & 7,500 \\\text { Interest on home mortgage and property taxes on personal residence } & 7,200 \\\text { State income tax } & 2,200\end{array}$$ What is Al's AGI?

A)$94,100.
B)$103,000.
C)$107,000.
D)$127,000.
E)None of these.

Question 54

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 55

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 56

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

Question 57

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

Question 58

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 these.

Question 59

Ralph 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 60

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

Question 61

Rex, a cash basis calendar year taxpayer, runs a bingo operation that is illegal under state law.During 2019, a bill designated H.R.9 is introduced into the state legislature, which, if enacted, would legitimize bingo games.In 2019, Rex had the following expenses: $$\begin{array} { l r } \text { Operating expenses in conducting bingo games } & \$ 247,000 \\\text { Payoff money to state and local police } & 24,000 \\\text { Newspaper ads supporting H.R. } 9 & 3,000 \\\text { Political contributions to legislators who support H.R. 9 } & 8,000\end{array}$$ Of these expenditures, Rex may deduct:

A)$247,000.
B)$250,000.
C)$258,000.
D)$282,000.
E)None of these.

Question 62

Priscella pursued a hobby of making bedspreads in her spare time.Her AGI before considering the hobby is $40,000. During 2019 she sold the bedspreads for $10,000.She incurred expenses as follows: $$\begin{array} { l r } \text { Supplies } & \$ 4,000 \\\text { Interest on loan to get business started } & 500 \\\text { Advertising } & 6,500\end{array}$$ Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

A)Include $10,000 in income and deduct $11,000 for AGI.
B)Ignore both income and expenses since hobby losses are disallowed.
C)Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions.
D)Include $10,000 in income and deduct nothing.
E)None of these.

Question 63

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 these are relevant factors.

Question 64

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 these are "trade or business" expenses.

Question 65

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.

Question 66

Paula is the sole shareholder of Violet, Inc.For 2019, she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2019 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 these is correct.

Question 67

During 2018, 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 2019.What is the amount of the deduction for salary expense?

A)If Silver uses the cash method, $175,000 in 2018 and $0 in 2019.
B)If Silver uses the cash method, $0 in 2018 and $195,000 in 2019.
C)If Silver uses the accrual method, $175,000 in 2018 and $20,000 in 2019.
D)If Silver uses the accrual method, $195,000 in 2018 and $0 in 2019.
E)None of these is correct.

Question 68

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 these.

Question 69

Which of the following is incorrect?

A)Alimony, if deductible, 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 these are correct.

Question 70

Which of the following may be deductible in 2019?

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 these.
E)None of these.

Question 71

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% floor.
C)A deduction from AGI, not subject to the 2% 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 72

For an activity classified as a hobby, the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion).
(2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest.
(3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies).
For tax years before 2018, if these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is:

A)(1), (2), (3).
B)(1), (3), (2).
C)(2), (3), (1).
D)(2), (1), (3).
E)(3), (2), (1).

Question 73

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. $$\begin{array} { l r r } & \underline {\text { Terry} } & \underline { \text { Jim } } \\\text { Employee salaries } & \$ 200,000 & \$ 200,000 \\\text { Bribes to police } & 25,000 & 25,000 \\\text { Rent and utilities } & 50,000 & 50,000 \\\text { Cost of goods sold } & - 0 - & 125,000\end{array}$$ Which of the following statements is correct?

A)Neither Terry nor Jim can deduct any of these 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 these.

Question 74

Tom operates an illegal drug-running operation and incurred the following expenses: $$\begin{array} { l r } \text { Salaries } & \$ 75,000 \\\text { Illegal kickbacks } & 20,000 \\\text { Bribes to border guards } & 25,000 \\\text { Cost of goods sold } & 160,000 \\\text { Rent } & 8,000 \\\text { Interest } & 10,000 \\\text { Insurance on furniture and fixtures } & 6,000 \\\text { Utilities and telephone } & 20,000\end{array}$$ Which of the following amounts reduces his taxable income?

A)$119,000.
B)$160,000.
C)$279,000.
D)$324,000.
E)None of these.

Question 75

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida and wants to expand to other states.During 2019, 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 2019.
C)Expense $9,000 for 2019 and capitalize $14,000.
D)Capitalize $23,000.
E)None of these.

Question 76

Petal, Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2019, the following associated with bad debts occur . $$\begin{array} { l r } \text { Credit sales } & \$ 400,000 \\\text { Collections on credit sales } & 250,000 \\\text { Amount added to the reserve } & 10,000 \\\text { Beginning balance in the reserve } & - 0 - \\\text { Identifiable bad debts during 2019 } & 12,000\end{array}$$ The amount of the deduction for bad debt expense for Petal for 2019 is:

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

Question 77

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

A)Ordinary
B)Necessary
C)Reasonable
D)All of these
E)None of these

Question 78

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 these.

Question 79

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 these.

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 these.