Question 1

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

The statement is true. According to the 12-month rule, prepaid expenses can be deducted in the current tax year if they expire or are consumed before the end of the tax year following the year of payment.

Question 2

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

The type of accounting method used for each business entity is determined by the nature of the entity's activities and the requirements of applicable tax laws. It is possible for Isabella to use different methods for each entity if they have different types of activities and are subject to different tax regulations.

Question 3

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 4

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. Deductions for AGI are adjustments made before calculating the adjusted gross income, while deductions from AGI, also known as itemized deductions, are made after calculating the adjusted gross income.

Question 5

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 based on the services provided by the family member to the corporation. However, the salary must meet the IRS criteria for reasonableness and cannot be used as a means of avoiding taxes on other income.

Question 6

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 does not decrease Aaron's gross income; it remains taxable to him. Instead, it disallows the deduction for the excess portion to Pigeon, Inc., potentially increasing the corporation's taxable income by $100,000.

Question 7

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 IRA contributions) reduce taxable income, while deductions for AGI (such as business expenses or self-employed health insurance premiums) reduce AGI. The tax benefit for each type of deduction can vary depending on Mitch's specific tax situation.

Question 8

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 by a cash basis taxpayer is generally deductible in the period it is 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 9

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 members of the Armed Forces on active duty who move pursuant to a military order.

Question 10

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 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, as the payment has not actually been received. The cash basis method only recognizes income and expenses when they are actually received or paid, respectively.

Question 12

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 a particular trade or business, regardless of whether it is a one-time or recurring expense.

Question 13

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 14

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 15

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 considered deductions for AGI, meaning they can be deducted before calculating adjusted gross income.

Question 16

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

The portion of a shareholder-employee's salary that is classified as unreasonable is subject to reclassification as a dividend, but it still counts as income for the shareholder-employee. However, it is not deductible for the corporation, which means that it increases the corporation's taxable income.

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, such as paying a fee to an investment manager, are no longer deductible from adjusted gross income in 2019 due to changes in the tax code. They may still be deductible under certain circumstances, but as itemized deductions subject to limitations.

Question 18

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

Accepted Answer

This is true. The tax code does not provide a clear definition of what is considered a trade or business. It is generally interpreted to include any activity that is carried out with the intention of making a profit, but there are many factors that can influence whether or not an activity qualifies as a business for tax purposes.

Question 19

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 are used to determine the timing of deduction for accrual basis taxpayers. These tests ensure that expenses are only deducted in the year in which they are incurred and when economic performance has occurred.

Question 20

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

Accepted Answer

This is true. As a sole proprietor, the business income and expenses are reported on Schedule C of the owner's personal tax return.

Quiz 6: Deductions and Losses: in General