Question 1

The vacation home limitations of Section 280A may also apply to boats and mobile homes.

Accepted Answer

The term "dwelling unit" is very expansive and is based on whether the property provides shelter and accommodations for eating and sleeping.

Question 2

Brienne sells land to her brother, Abe, at a loss. A few years later, Abe sells the land to an unrelated party for a substantial gain. Brienne can recognize her realized loss on the land when Abe sells the land to an unrelated party.

Accepted Answer

Brienne will never recognize the loss. Abe will be able to offset his gain by Brienne's loss.

Question 3

Losses on the sale of property between a taxpayer and his/her more than 50-percent-owned corporation are disallowed.

Accepted Answer

Losses on sales between related parties are not allowed. A shareholder and his more than 50-percent-owned corporation are related parties.

Question 4

Which of the following statements is false?

Accepted Answer

No tax deduction is allowed until warranty work is actually done.

Question 5

Losses incurred on wash sales of stock or securities are generally disallowed in the year of sale.

Accepted Answer

The wash sale limitations prevent the creation of artificial losses for tax purposes.

Question 6

Expenses attributable to the rental use of a taxpayer's personal residence are limited to the gross income generated by the property.

Accepted Answer

A net loss cannot be recognized on a vacation home.

Question 7

Discuss when expenses are deductible under the accrual method of accounting.

Accepted Answer

The answer of Discuss when expenses are deductible under the...

Question 8

Under the wash sale rule, if all of the sold shares are not re-purchased within the relevant time period, a portion of the loss on the sale is allowed.

Accepted Answer

The portion of the loss relating to the shares not replaced will be allowed.

Question 9

If an activity produces a profit for at least two years during a consecutive five-year period, the burden of proof shifts to the IRS to show that the activity is not profit-motivated.

Accepted Answer

The time period is three out of five years.

Question 10

Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.

Accepted Answer

As hobbies are not primarily pursued for profit, the losses cannot be recognized.

Question 11

On July 1 of the current year, Marcia purchases a small office building to use in her business and borrows $320,000. Marcia is required to pay two points on the loan. The loan is secured by the property and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on July 1 of the current year. How much, if any, of the points may Marcia deduct in the current year?

Accepted Answer

Marcia may deduct the points paid in the current year because they are a cost of obtaining a loan for the business property. Two points on a $320,000 loan is $6,400. However, points are typically amortized over the life of the loan, which would be 20 years in this case. This means that Marcia may deduct 1/20th of the points each year, which is $320 ($6,400 ÷ 20). Since she purchased the property and obtained the loan on July 1, she may only deduct half of the annual amount in the current year, which is $160 ($320 ÷ 2). Therefore, the correct answer is B.

Question 12

If a loss is disallowed under Section 267, a gain on a subsequent sale of the property by the related purchaser may be offset by the previously unrecognized loss.

Accepted Answer

The original seller of the property in a related party sale will never recognize the loss, but if the purchaser later sells the property for a gain, the purchaser can offset the gain with the unrecognized loss.

Question 13

Hobby expenses are deductible as for AGI deductions.

Accepted Answer

Hobby-related expenses, to the extent allowed, are itemized deductions.

Question 14

Under the accrual method, recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for

Accepted Answer

There is no requirement that the expense be material.

Question 15

A wash sale occurs when a taxpayer realizes a loss on the sale of stock or securities and the taxpayer acquires substantially identical stock or securities within a 61 day period after the date of sale.

Accepted Answer

The 61-day period of time extends from 30 days before the date of the sale to 30 days after the date of the sale.

Question 16

On August 1 of the current year, Terry refinances her home and borrows $240,000. Terry is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on August 1 of the current year. How much, if any, of the points may Terry deduct in the current year?

Accepted Answer

$240,000 × 2% = $4,800 points paid. 20 years × 12 months per year = 240 months in the loan. $4,800 ÷ 240 = $20.00 per month amortization. Five months this year: $20 × 5 = $100.

Question 17

Generally, Section 267 requires that the deduction of unpaid (accrued) expenses be deferred until the year in which the related payee recognizes the amount as income.

Accepted Answer

An accrual basis taxpayer cannot deduct accrued expenses owed to a cash-basis related party.

Question 18

Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received?

Accepted Answer

There is no requirement for an accrual basis taxpayer to pay an expense in order to get a deduction.

Question 19

Losses on sales of property between a taxpayer and his/her siblings are disallowed.

Accepted Answer

Losses on sales between related parties are not allowed.

Question 20

On July 1 of the current year, Marcia purchases a new home and borrows $320,000. Marcia is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on July 1 of the current year. How much, if any, of the points may Marcia deduct in the current year?

Accepted Answer

Because these points are paid in connection with the purchase of a principal residence, Marcia may deduct $6,400 ($320,000 × 2%) as interest expense during the current year.

Quiz 6: Deductions and Losses