Question 1

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.

Accepted Answer

Prepaid rent paid by a cash basis taxpayer is generally deductible in the period paid, even if it covers future periods; however, for tax purposes, the deduction may need to be allocated to the periods to which the rent applies.

Question 2

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.

Accepted Answer

The reclassification of $100,000 as unreasonable compensation would not decrease Aaron's gross income by $100,000. Instead, it would increase Pigeon, Inc.'s taxable income by $100,000 because the IRS would disallow that portion of the salary as a deductible business expense for Pigeon, Inc. Aaron's gross income would remain the same because he still received the $300,000 as compensation.

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

It is possible for a business owner to choose different accounting methods for different business entities they own. The cash method may be more appropriate for a small or service-based business, while the accrual method may be more suitable for a larger business with more complex transactions. Ultimately, the choice of accounting method should depend on the needs and characteristics of each individual business entity.

Question 5

Only some employment related expenses are classified as deductions for AGI.

Accepted Answer

Only certain employment related expenses are categorized as deductions for AGI, such as expenses related to education, job search, and moving. Other expenses may be categorized as itemized deductions.

Question 6

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

Accepted Answer

This is true. The income of a sole proprietorship is reported on Schedule C of the owner's personal tax return. This schedule shows the business's revenue, expenses, and net profit (or loss) for the year.

Question 7

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

Accepted Answer

Losses on the sale of personal use assets are generally not deductible for tax purposes.

Question 8

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

Accepted Answer

The Code does not provide a clear definition of what is considered a trade or business. It is up to the courts and the Internal Revenue Service (IRS) to interpret and apply the law in determining whether an activity qualifies as a trade or business for tax purposes.

Question 9

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.

Accepted Answer

A closely-held family corporation can take a deduction for a salary paid to a family member if it is reasonable and necessary for the services provided. However, the salary must be calculated based on the fair market value of the services rendered and cannot be used as a way to artificially reduce corporate taxable income.

Question 10

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

Accepted Answer

This is because the portion of a shareholder-employee's salary that is classified as unreasonable is not deductible by the corporation, which increases the taxable income of the corporation. However, it does not affect the gross income of the shareholder-employee.

Question 11

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

Accepted Answer

Section 212 expenses related to rent and royalty income are deductible as deductions for Adjusted Gross Income (AGI) on Form 1040. These expenses reduce the taxpayer's taxable income and ultimately their tax liability.

Question 12

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

Accepted Answer

This is a basic principle of tax law. Expenses that are incurred for the purpose of earning income (such as business expenses or investment expenses) are generally deductible from gross income, which reduces the taxpayer's adjusted gross income (AGI).

Question 13

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

Accepted Answer

The answer of Alice incurs qualified moving expenses of $12,000....

Question 14

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

Accepted Answer

Deductions are generally not allowed unless a specific provision in the tax law explicitly permits them.

Question 15

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

Accepted Answer

An expense is considered ordinary if it is common and accepted in your industry or business, regardless of whether it is a one-time or recurring expense.

Question 16

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

Accepted Answer

The answer of Depending on the nature of the expenditure,...

Question 17

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

Accepted Answer

The answer of The cash method can be used even...

Question 18

Mitch is in the 28% 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 $1,000 expenditure that is classified as a deduction for AGI.

Accepted Answer

Deductions from AGI, also known as above-the-line deductions, reduce Mitch's taxable income and can therefore result in a lower overall tax liability. A $2,000 deduction from AGI will have a greater impact on reducing his taxable income than a $1,000 deduction from AGI, potentially resulting in a larger tax benefit. However, this ultimately depends on his individual tax situation and other factors such as the specific deductions he is claiming.

Question 19

Under the "one­year 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.

Accepted Answer

The one-year rule states that prepaid expenses must expire or be consumed by the end of the tax year following the year of payment in order to be deductible in the current period for cash basis taxpayers.

Question 20

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

Accepted Answer

A taxpayer's note or promise to pay does not actually represent a payment of cash. Therefore, it does not satisfy the "actually paid" requirement for the cash basis method of accounting. The taxpayer must wait to record the transaction until the note is actually paid with cash or a cash equivalent.

Quiz 6: Deductions and Losses: in General

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.

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.

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

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

Only some employment related expenses are classified as deductions for AGI.

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

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

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

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.

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

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

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

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

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

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

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

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

Mitch is in the 28% 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 $1,000 expenditure that is classified as a deduction for AGI.

Under the "oneyear 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.

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

Quiz 6: Deductions and Losses: in General

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.

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.

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

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

Only some employment related expenses are classified as deductions for AGI.

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

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

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

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.

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

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

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

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

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

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

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

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

Mitch is in the 28% 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 $1,000 expenditure that is classified as a deduction for AGI.

Under the "one­year 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.

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

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

Under the "oneyear 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.