Question 1

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

Accepted Answer

An expense is considered ordinary if it is customary or usual for businesses in that industry, regardless of whether it is a one-time or recurring expense.

Question 2

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 up to interpretation and analysis of individual situations.

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.

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 4

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, such as property taxes, maintenance expenses, and property management fees, are deductible 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.

Accepted Answer

The economic performance and all events tests are used to determine when an expense can be deducted for accrual basis taxpayers.

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.

Accepted Answer

As of the Tax Cuts and Jobs Act of 2017, moving expenses are no longer deductible for most taxpayers from 2018 through 2025, except for active-duty members of the Armed Forces under certain conditions.

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.

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 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.

Accepted Answer

Deductions from AGI (such as contributions to a traditional IRA) reduce Mitch's taxable income, while deductions for AGI (such as charitable donations) are taken into account before calculating his taxable income. This means that the tax benefit for a deduction from AGI may be larger for Mitch than for 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.

Accepted Answer

A taxpayer's note or promise to pay is not considered actual payment under the cash basis method of accounting. Actual payment must be in the form of cash, check, or electronic payment.

Question 10

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 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.

Accepted Answer

This is because the portion of a shareholder-employee's salary that is classified as unreasonable is not deductible by the corporation and is instead treated as a deemed dividend to the shareholder-employee, which does not affect their gross income but increases 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.

Accepted Answer

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

Question 13

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

Accepted Answer

This statement is true. As a single owner business, the income and expenses of a sole proprietorship are reported on Schedule C when filing a personal tax return.

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.

Accepted Answer

A closely held family corporation can take a deduction for a salary paid to a family member if the salary is reasonable and for services actually rendered. However, the salary must be commensurate with the services performed and the amount paid to an owner-employee must not be higher than what would normally be paid to a non-owner-employee for the same services.

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.

Accepted Answer

Under the 12-month rule, prepaid expenses can be deducted in the current year if they expire or are consumed by the end of the tax year following the year of payment. This applies to cash basis taxpayers who are individuals or entities with average annual gross receipts not exceeding $26 million for the three preceding tax years.

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.

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 17

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

Accepted Answer

Investment-related expenses were not deductible from adjusted gross income in 2019 due to the Tax Cuts and Jobs Act, which suspended miscellaneous itemized deductions subject to the 2% floor, including investment expenses, from 2018 through 2025.

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.

Accepted Answer

It is possible for Isabella to use different accounting methods for her two different business entities, as long as each entity meets the qualifications for the chosen method.

Question 19

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 20

Unreimbursed employment related expenses are classified as deductions for AGI.

Accepted Answer

Unreimbursed employment-related expenses are classified as deductions from AGI, not for AGI. They are itemized deductions subject to the 2% floor of adjusted gross income (AGI) on Schedule A of Form 1040, although the Tax Cuts and Jobs Act of 2017 suspended these deductions for most taxpayers for tax years 2018 through 2025.

Quiz 6: Deductions and Losses: in General