Question 1

A sole proprietor contributes to the election campaign of a state governor.The candidate has promised to change a law that severely limits the growth of the sole proprietor's business.Given the direct benefit,the sole proprietor can deduct the contribution.

Accepted Answer

While lobbying expenses may be deductible under very limited criteria, contributions to political candidates or political parties are never allowed as a deduction.

Question 2

Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible.

Accepted Answer

The income derived from a tax-exempt security is not taxable so the expenses that support the nontaxable investment are not deductible.

Question 3

Taxpayers may deduct lobbying expenses incurred to influence legislation at any governmental level if the legislation is of direct interest to the taxpayer's trade or business.

Accepted Answer

Only lobbying expenses to influence local legislation are deductible.

Question 4

Which of the following factors is important in distinguishing between capital and revenue expenditures?

Accepted Answer

D) All of the specified factors are important in distinguishing between capital and revenue expenditures.

Question 5

Emeril borrows $340,000 to finance taxable and tax-exempt investments.He incurs $18,000 investment interest expense,allocated equally between the taxable and tax-exempt investments.Ignore any possible investment interest expense limitation.How much of the interest expense is deductible,and where is it deductible?

Accepted Answer

D) Interest incurred to acquire tax-exempt investments is not deductible. Deductible investment interest expense is not enumerated in Sec. 62 as a "for AGI" deduction so it is a "from AGI" deduction.

Question 6

Jimmy owns a trucking business.During the current year he incurred the following:

The fines for speeding were a necessary cost because missing deadlines would cause lost business and are ordinary in the industry.What is the total amount of deductible expenses?

Accepted Answer

A) Bribes and fines are not deductible. The gasoline and maintenance costs are allowed. $100,000 + $15,000 = $115,000.

Question 7

Kickbacks and bribes paid to federal officials are deductible only if related to the taxpayer's trade or business.

Accepted Answer

Illegal payments to governmental officials are contrary to public policy.

Question 8

Kaitlyn owns a hotel in Phoenix,Arizona.The Arizona legislature has proposed legislation to increase the hotel room tax.Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation.Kaitlyn can deduct the $1,000.

Accepted Answer

Lobbying expenses that are of direct interest to a taxpayer's business can only be deducted if related to local legislation.

Question 9

Kaitlyn owns a hotel in Phoenix,Arizona.The city of Phoenix has proposed legislation to increase the hotel room tax.Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation.Kaitlyn can deduct the $1,000.

Accepted Answer

Expenses incurred to influence legislation at the local level (i.e. lobbying expenses) are deductible if of direct interest to the taxpayer's business.

Question 10

A taxpayer opens a new business this year.Prior to opening,she incurred $45,000 of business investigation and preopening costs.The taxpayer can elect to currently deduct $5,000 and amortize the balance over 180 months.

Accepted Answer

A taxpayer can elect to immediately deduct up to $5,000 of start-up expenditures, with the balance amortized over 180 months. Limitations apply when expenditures exceed $50,000.

Question 11

Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.

Accepted Answer

For new business ventures, the key to current deduction of business investigation and pre-opening costs or capitalization and amortization of those costs rests on whether the taxpayer is already engaged in a similar business.

Question 12

Ronna is a professional golfer.In order to correct her vision,Ronna has eye surgery.The costs of the surgery and subsequent medical care are not covered by insurance.What tax issues should Ronna consider?

Accepted Answer

The answer of Ronna is a professional golfer.In order to...

Question 13

Capital expenditures add to the value,substantially prolong the useful life,or restore the life of the property.

Accepted Answer

Capital expenditures must be differentiated from expenditures from currently deductible repairs and maintenance which keep an asset in normal operating order.

Question 14

During the current year,the United States files criminal and civil actions against Joe,the CEO of Box Corporation,and Jane,the president of Cable Corporation,for price fixing.Both enter pleas of no contest and appropriate judgments are entered.Subsequent to this action,Square Corporation sues both Box and Cable for treble damages of $6,000,000.In settlement,Box and Cable each pay Square $1,200,000.What is the maximum amount that Box and Cable may each deduct?

Accepted Answer

A) The IRC disallows a deduction for two-thirds of any payment the taxpayer makes for damages resulting from a conviction (or a guilty or no-contest plea) in any criminal violation of federal antitrust laws. $1,200,000/3 = $400,000

Question 15

Fines and penalties are tax deductible if related to the taxpayer's trade or business.

Accepted Answer

Fines and penalties are contrary to public policy.

Question 16

Sacha,a dentist,has significant investment assets.She holds corporate bonds,municipal bonds,stocks and mutual funds.Sacha paid $1,500 to an investment adviser to conduct a portfolio review and to prepare a recommendation for rebalancing her portfolio.Which of the following statements is correct regarding the tax treatment of the $1,500 fee?

Accepted Answer

C) Investment-related expenses are deductible, usually as a miscellaneous itemized deductions, but if tax-exempt securities are held, some of the investment expense will be allocated to these securities and disallowed.

Question 17

During the current year,Ivan begins construction of an office building and a hotel.He incurs $10,000 in property taxes during the construction of the office building and $15,000 for the hotel.Which of the following statements is true of the property taxes during the construction period?

Accepted Answer

C) Separate elections to capitalize the property taxes are allowed on the different properties.

Question 18

Troy incurs the following expenses in his business,an illegal gambling establishment:

His deductible expenses are

Accepted Answer

C) $200,000 + $60,000 + $70,000 = $330,000. While ordinary expenses of illegal businesses are generally deductible, bribes of government officials are not deductible.

Question 19

Mickey has a rare blood type and sells his blood for payment on a regular basis.In order to maintain the quality of his blood,Mickey takes expensive vitamins and nutritional supplements.What tax issues should Mickey consider?

Accepted Answer

The answer of Mickey has a rare blood type and...

Question 20

During 2017 and 2018,Danny pays property taxes of $3,500 each year on a piece of land.During 2017,the land is vacant and unproductive.In 2018,Danny uses the land as a parking lot and generates $16,000 in income.Which of the following is true regarding the property taxes?

Accepted Answer

D) A taxpayer may elect to capitalize the expenses on unimproved and unproductive real estate each year. Therefore, Danny may either capitalize or deduct the $3,500 in 2017 but he must deduct the $3,500 in 2018.

Quiz 6: Deductions and Losses