Question 1

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

This statement is true. The portion of a shareholder-employee's salary that is classified as unreasonable may be disallowed as a deductible expense for the corporation, resulting in an increase in taxable income for the corporation. However, it does not affect the gross income reported by the shareholder-employee.

Question 2

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

Accepted Answer

Expenses incurred for the production or collection of income are generally deductible from adjusted gross income according to the IRS. These expenses may include things like business-related expenses, investment expenses, and rental property expenses. However, there are certain limitations and restrictions on what can be deducted and how much can be deducted, so it is important to consult with a tax professional or the IRS for guidance.

Question 3

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

Accepted Answer

An ordinary expense refers to one that is common and accepted in your trade or business. It does not have to be recurring, but it should be a typical and necessary cost associated with operating your business.

Question 4

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 5

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

Accepted Answer

The Code does not have a precise definition of what qualifies as a trade or business. It can vary depending on the facts and circumstances of each case.

Question 6

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

Accepted Answer

This is true. As a pass-through entity, the income and expenses of a sole proprietorship are reported on Schedule C of the owner's individual income tax return (Form 1040).

Question 7

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 8

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

Accepted Answer

Qualified moving expenses are not deductible for tax years after 2017 due to the Tax Cuts and Jobs Act, except for active duty members of the Armed Forces.

Question 9

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 10

Mitch is in the 28% 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 $1,000 expenditure that is classified as a deduction for AGI.

Accepted Answer

The tax benefit for a deduction from AGI is higher than the tax benefit for a deduction for AGI, so Mitch 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 $1,000 expenditure that is classified as a deduction for AGI.

Question 11

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 if the salary is reasonable and for services actually rendered. However, if the salary is not reasonable or if the family member has not actually performed services, the deduction may be disallowed by the IRS.

Question 12

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

This is because the type of accounting method used is determined by the specific business entity and its characteristics, not by the fact that the owner has multiple entities. Therefore, it is possible for Isabella to use the cash method for one of her businesses and the accrual method for the other, as long as each business entity meets the criteria for the respective accounting method.

Question 13

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. Therefore, a promise to pay is not considered "actually paid" until the payment is made.

Question 14

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 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 classified as deductions for AGI, which means they can be deducted from gross income to arrive at adjusted gross income (AGI).

Question 16

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 17

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 accrual basis taxpayer can deduct an expense. These tests ensure that the expense has been incurred and the liability for payment has been established before it can be deducted.

Question 18

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Accepted Answer

The cash method is generally not allowed for businesses where inventory is a significant income-producing factor, as it does not accurately reflect income and expenses related to inventory.

Question 19

Under the "one-year 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 "one-year rule" for current period deduction of prepaid expenses for cash basis taxpayers requires that the asset must expire or be consumed by the end of the tax year following the year of payment. Therefore, prepaid expenses that fail to meet this requirement must be capitalized and deducted in a later year when they are actually consumed or expire.

Question 20

Only some employment related expenses are classified as deductions for AGI.

Accepted Answer

Only certain employment related expenses, such as those related to education or moving for a new job, are classified as deductions for AGI. Others may be classified as itemized deductions or may not be deductible at all.

Quiz 6: Deductions and Losses: in General