Question 1

Business expenses (other than interest) related to tax-exempt interest income are deductible.

Accepted Answer

Business expenses related to tax-exempt interest income are deductible under certain conditions and limitations as per the IRS guidelines.

Question 2

For tax purposes, the term "nonbusiness expense" refers to nondeductible personal expenses, such as the costs of personal hygiene.

Accepted Answer

False

Question 3

T's itemized deductions for the current year are $14,000.Assuming the standard deduction is $5,000, T may deduct no more than $9,000 of her itemized deductions.

Accepted Answer

T can deduct the full amount of her itemized deductions ($14,000) if they are more than the standard deduction ($5,000), not just the difference.

Question 4

Expenditures for goodwill may be recovered for tax purposes only when there is a disposition of the asset such as a sale or exchange, and not through amortization.

Accepted Answer

The answer of Expenditures for goodwill may be recovered for...

Question 5

Fees paid for preparation of a tax return are deductible only if they are related to a taxpayer's trade, business, or activity engaged in for profit.

Accepted Answer

The answer of Fees paid for preparation of a tax...

Question 6

V bought electric motors for her business from a sales representative who said that they had a four horsepower output.V discovered while using the motors that they only produce two horsepower after a few weeks use.V may recognize as a loss the value of the reduction in horsepower and currently deduct the amount as a business expense.

Accepted Answer

The reduction in horsepower and the consequent loss in value of the electric motors would typically be considered a capital loss, not a currently deductible business expense. Business expenses are generally for more immediate costs rather than depreciations or devaluations of capital assets.

Question 7

Expenses incurred in the production of income, such as legal fees and safe deposit box rentals, may be deducted even though the income produced is wholly tax-exempt (i.e., municipal bond interest income).

Accepted Answer

Expenses incurred to produce tax-exempt income, such as interest on municipal bonds, are not deductible for federal income tax purposes.

Question 8

Either W or one of his employees visits a local factory every week to wash the windows.W may deduct the cost of all of his expenses from washing windows.

Accepted Answer

Since W or his employee is visiting a local factory every week to wash the windows, the cost of all the expenses incurred in washing windows can be considered as a business expense and can be deducted from the income. This is a common practice for small businesses to reduce their tax burden.

Question 9

With respect to the deduction for hobby expenses, the taxpayer's expectation of profit need not be considered reasonable in order for the expense to be deductible.

Accepted Answer

The taxpayer's expectation of profit is not a factor in determining whether hobby expenses are deductible.

Question 10

According to the Cohan rule, taxpayers may deduct reasonable estimates of expenses where they have no evidence, such as a receipt, to substantiate the actual amount.

Accepted Answer

The Cohan rule allows taxpayers to make a reasonable estimate of expenses if they have no evidence to substantiate the actual amount. However, the estimate must be based on a reasonable basis and the taxpayer must have actually incurred the expenses.

Question 11

Any expense that is reimbursed by the taxpayer's employer is deductible for A.G.I, (e.g., reimbursement of a parking ticket incurred by a salesperson when calling on a customer).

Accepted Answer

Reimbursed expenses are not deductible for Adjusted Gross Income (AGI) because they are not incurred by the taxpayer; the employer's reimbursement negates the expense for the taxpayer.

Question 12

An "ordinary" business expense need not be recurring.

Accepted Answer

An ordinary business expense is an expense that is common and accepted in the industry or trade and is considered necessary for the operation of a business, regardless of whether it occurs repeatedly or not. It can be a one-time expense or a recurring expense.

Question 13

Deductible expenses related to an activity that is considered a hobby, and that are not otherwise allowable, are treated as miscellaneous itemized deductions and can be deducted only to the extent they exceed two percent of A.G.I.

Accepted Answer

Deductible expenses related to a hobby are treated as miscellaneous itemized deductions and can only be deducted if they exceed two percent of adjusted gross income.

Question 14

A cash basis taxpayer may deduct all prepaid interest in the year it is paid.

Accepted Answer

A cash basis taxpayer can only deduct prepaid interest to the extent that it applies to the current tax year; interest that applies to future years must be deducted in those future years.

Question 15

Tax preparation fees incurred by an individual generally are treated as miscellaneous itemized deductions and can be deducted only to the extent they exceed two percent of A.G.I.

Accepted Answer

Tax preparation fees are generally considered as miscellaneous itemized deductions and can be deducted only if they exceed two percent of the taxpayer's adjusted gross income (AGI).

Question 16

H recently purchased a residence for himself and his family for $60,000.Shortly thereafter, property nearby was rezoned by the city council for light commercial businesses.As a result, the value of H's house dropped to $50,000.H may deduct a loss of $10,000.

Accepted Answer

Losses on the sale of personal-use property, such as a primary residence, are not deductible for tax purposes.

Question 17

As an employee for BBB, J earned a salary of $40,000 and incurred unreimbursed employee business expenses of $1,000.Assuming J itemizes his deductions, he may deduct all of his expenses.

Accepted Answer

Under the Tax Cuts and Jobs Act of 2017, unreimbursed employee business expenses are no longer deductible for federal income tax purposes for tax years 2018 through 2025.

Question 18

In regard to the statutory scheme for determining deductibility, a taxpayer may deduct an expense only if it is "specifically" identified (e.g., interest) as deductible in the Code.For example, advertising expense of a business would not be deductible unless a code provision specifically indicated that advertising expense is deductible.

Accepted Answer

The tax code allows for the deduction of ordinary and necessary business expenses under Section 162 of the Internal Revenue Code, without requiring each type of expense to be specifically identified. Advertising expenses are generally considered to be ordinary and necessary expenses of carrying on a trade or business and are therefore deductible.

Question 19

If taxpayer B pays a dependent son's real estate taxes, B cannot deduct the expense.

Accepted Answer

Taxpayers cannot deduct real estate taxes paid on a property they do not own, even if they paid them for a dependent.

Question 20

J, employed as a male dancer, regularly uses a tanning salon to keep his body looking healthy.J may deduct the cost of visiting the tanning salon.

Accepted Answer

The IRS does not allow deductions for tanning salon expenses as they are considered personal expenses and not necessary for the production of income.

Quiz 7: Overview of Deductions and Losses