Question 1

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 2

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 business or trade, regardless of whether it's a one-time or recurring expense.

Question 3

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 use different accounting methods for different entities they own. The decision of which method to use depends on various factors, such as the nature of the business and its size.

Question 4

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 5

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.

Accepted Answer

The cash method cannot always be used by corporations if inventory and cost of goods sold are a significant income-producing factor. In such cases, the accrual method is generally required to more accurately match income and expenses.

Question 6

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 AGI than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

Accepted Answer

Deductions from AGI (also known as itemized deductions) are subject to limitations based on the taxpayer's income level, which can affect the amount of tax benefit received. Deductions for AGI (also known as above-the-line deductions) are subtracted from gross income to calculate AGI, and therefore provide a greater tax benefit regardless of income level. As Mitch is in the 24% tax bracket, this difference in tax benefit could be significant.

Question 7

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 8

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 for AGI on Schedule E of Form 1040. These expenses include property taxes, mortgage interest, utilities, maintenance and repairs, insurance, property management fees, and depreciation.

Question 9

In 2018, unreimbursed employment related expenses are classified as deductions for AGI.

Accepted Answer

Unreimbursed employment related expenses were previously deductible as itemized deductions, but this changed with the Tax Cuts and Jobs Act of 2017. As of 2018, these expenses are no longer deductible as itemized deductions, and are not classified as above-the-line deductions (deductions for AGI) either.

Question 10

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 11

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 satisfy the "actually paid" requirement for the cash basis method of accounting. The cash basis method only recognizes income and expenses when they are actually received or paid, respectively. A note or promise to pay is not considered actual payment until it is received.

Question 12

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 may take a deduction for a salary paid to a family member as long as it is considered reasonable and compensates the family member for services provided to the corporation. However, the IRS may scrutinize salaries paid to family members to ensure they are not excessive and are comparable to salaries paid to non-family employees in similar positions.

Question 13

Investment related expenses, such as paying a fee to an investment manager, generally are deductions from
adjusted gross income in 2018.

Accepted Answer

Investment related expenses, such as paying a fee to an investment manager, were deductible as miscellaneous itemized deductions in previous tax years, but they are no longer deductible starting from the 2018 tax year.

Question 14

Alice incurs qualified moving expenses of $12,000 in 2018. If she is not reimbursed by her employer, the deduction is classified as a deduction for AGI.

Accepted Answer

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

Question 15

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

Economic performance and all events tests determine when an expense can be deducted for accrual basis taxpayers.

Question 16

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

Accepted Answer

The income of a sole proprietorship is reported on Schedule C Profit or Loss from Business on their personal tax return (Form 1040).

Question 17

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.

Accepted Answer

If a portion of a shareholder-employee's salary is classified as unreasonable, it is not deductible as an expense by the corporation and therefore increases the taxable income of the corporation, but it does not affect the shareholder-employee's gross income.

Question 18

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.

Accepted Answer

The "twelve month rule" states that prepaid expenses may be deducted in the current period if the asset is expected to expire or be consumed within 12 months after the end of the tax year in which the payment was made. Therefore, the asset must expire or be consumed by the end of the tax year following the year of payment.

Question 19

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

Accepted Answer

The Code does not provide a specific definition of what constitutes a trade or business, leaving it open to interpretation based on various factors and circumstances.

Question 20

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.

Quiz 6: Deductions and Losses: in General