Question 1

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

Which of the above amounts reduces his taxable income?

A) $ \$ 0 $
B) $\$ 160,000$.
C) $\$ 279,000$.
D) $\$324,000$ .
E)None of the ahove

Accepted Answer

The answer of Tom operates an illegal drug-running operation and...

Question 2

Paula is the sole shareholder of Violet, Inc. For 2014, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2014 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.

Accepted Answer

The answer of Paula is the sole shareholder of Violet,...

Question 3

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.

Accepted Answer

According to IRS regulations, if a taxpayer acquires a business engaged in a similar trade or business, the expenses incurred in investigating the acquired business may be deducted immediately. This is true even if the taxpayer ultimately decides not to acquire the business. Option A is incorrect because expenses incurred before a taxpayer enters into a trade or business are generally not deductible. Option C is incorrect as there is no such requirement. Option D is incorrect because, as stated in Option B, the expenses may be deductible immediately.

Question 4

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.

Accepted Answer

Mortgage interest on a building used in a business is a deduction for AGI. A and B are deductions from AGI, while D is not deductible at all. Therefore, the correct answer is C.

Question 5

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.

Accepted Answer

Investigation expenses incurred by an individual for the purpose of acquiring a business are generally not deductible since they are considered personal, living, or family expenses. Therefore, Tommy cannot deduct any investigation expenses if he decides not to acquire the fast food franchise.

Question 6

Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct?
A) If Benita is a cash method taxpayer, she cannot deduct the expense until 2015.
B) If Benita is an accrual method taxpayer, she can deduct the expense in 2014.
C) If Benita uses the accrual method, she can choose to deduct the expense in either 2014 or 2015.
D) Only b. and c. are correct.
E) a., b., and c. are correct.

Accepted Answer

The answer of Benita incurred a business expense on December...

Question 7

During 2013, 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 2014. What is the amount of the deduction for salary expense?
A) If Silver uses the cash method, $175,000 in 2013 and $0 in 2014.
B) If Silver uses the cash method, $0 in 2013 and $195,000 in 2014.
C) If Silver uses the accrual method, $175,000 in 2013 and $20,000 in 2014.
D) If Silver uses the accrual method, $195,000 in 2013 and $0 in 2014.
E) None of the above is correct.

Accepted Answer

The answer of During 2013, the first year of operations,...

Question 8

Which of the following is correct?
A) A personal casualty loss is classified as a deduction from AGI.
B) Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
C) An expense associated with rental property is classified as a deduction for AGI.
D) Only a. and b. are correct.
E) a., b., and c., are correct.

Accepted Answer

The answer of Which of the following is correct?
A) A...

Question 9

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.

Accepted Answer

All of the options listed (contributions to medical and pension plans and premiums on group term life insurance) are excluded from the $1 million limit on executive compensation for a publicly held corporation.

Question 10

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.
$\begin{array}{lrr}& \text { Terry } & \text { Jim } \
\text { Employee salaries } & \$ 200,000 & \$ 200,000 \
\text { Bribes to police } & 25,000 & 25,000 \
\text { Rent and utilities } & 50,000 & 50,000 \
\text { Cost of goods sold } & -0- & 125,000
\end{array}$
Which of the following statements is correct?
A) Neither Terry nor Jim can deduct any of 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.

Accepted Answer

The answer of Terry and Jim are both involved in...

Question 11

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.

Accepted Answer

A parking ticket paid on a business auto is not considered a "trade or business" expense as it is a penalty for violating traffic laws and does not directly relate to the operation or production of business income.

Question 12

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.

Accepted Answer

Andrew cannot deduct the parking tickets or the DUI ticket because they are considered personal expenses and not directly related to his business. The attorney's fee may be deductible if it is solely related to the DUI ticket, but it is not clear from the information given. In general, legal fees associated with criminal activity are not deductible. Therefore, Andrew cannot deduct any of these expenses.

Question 13

Which of the following is incorrect?
A) Alimony 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 the above are correct.

Accepted Answer

The answer of Which of the following is incorrect?
A) Alimony...

Question 14

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.

Accepted Answer

The deduction of a business expense requires that it must be ordinary, necessary, and reasonable. Therefore, option D is correct.

Question 15

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, 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 2014.
C) Expense $9,000 for 2014 and capitalize $14,000.
D) Capitalize $23,000.
E) None of the above.

Accepted Answer

The answer of Iris, a calendar year cash basis taxpayer,...

Question 16

Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2014, the following occur associated with bad debts.
$\begin{array}{lr}
\text { Credit sales } & \$ 400,000 \
\text { Collections on credit sales } & 250,000 \
\text { Amount added to the reserve } & 10,000 \
\text { Beginning balance in the reserve } & -0- \
\text { Identifiable bad debts during } 2014 & 12,000
\end{array}$
The amount of the deduction for bad debt expense for Petal for 2014 is:
A) $10,000.
B) $12,000.
C) $22,000.
D) $140,000.
E) None of the above.

Accepted Answer

The answer of Petal, Inc. is an accrual basis taxpayer....

Question 17

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.

Accepted Answer

The answer of Which of the following is not relevant...

Question 18

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.

Accepted Answer

Only legal expenses incurred in connection with a trade or business or rental or royalty property held for the production of income are deductible for AGI. Legal expenses related to tax advice for individual income tax returns are only deductible as an itemized deduction on Schedule A.

Question 19

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.

Accepted Answer

The answer of Payments by a cash basis taxpayer of...

Question 20

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.

Accepted Answer

The answer of Which of the following may be deductible?
A)...

Quiz 6: Deductions and Losses: in General

Paula is the sole shareholder of Violet, Inc. For 2014, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2014 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct?

Which of the following statements is correct in connection with the investigation of a business?

Which of the following are deductions for AGI?

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:

Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct?

During 2013, 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 2014. What is the amount of the deduction for salary expense?

Which of the following is correct?

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

Which of the following is not a "trade or business" expense?

Which of the following is incorrect?

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

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

Which of the following legal expenses are deductible for AGI?

Payments by a cash basis taxpayer of capital expenditures:

Which of the following may be deductible?