Question 1

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. These tests ensure that the expense has been incurred and the related liability has been paid or will be paid in the future. Once these tests are met, the expense can be deducted in the current tax year.

Question 2

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 accrual method must be used in these cases.

Question 3

Depending on the nature of the expenditure,expenses incurred in a trade or business may be deductible for or from
AGI.

Accepted Answer

Such expenses are deductible for AGI.

Question 4

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 each of her business entities, depending on the specific requirements and rules of each entity. The cash method and the accrual method are both acceptable accounting methods, and their use depends on various factors such as the type of business, its size, and its revenue recognition policies. Therefore, Isabella could potentially use the cash method for one business and the accrual method for the other, as long as it is advised and allowed by the relevant authorities.

Question 5

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 are deductible regardless of whether or not the taxpayer itemizes deductions.

Question 6

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

Moving expenses are classified as deductions for AGI.

Question 7

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

Accepted Answer

An expense is ordinary if it is normal,usual,or customary in the type of business conducted by the taxpayer and is not capital in nature.However,the expense need not be recurring to be deductible as ordinary.

Question 8

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

Only unreasonable salaries are not deductible.

Question 9

Deductions are allowed unless a specific provision in the tax law provides otherwise.

Accepted Answer

Deductions are a matter of legislative grace.The only deductions allowed are those specifically provided for by statute,rulings,etc.

Question 10

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

Accepted Answer

Under no circumstances can such a loss be deducted.

Question 11

The portion of a shareholder­employee's salary that is classified as unreasonable has no effect on the amount of a shareholder­employee'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 considered unreasonable is not deductible by the corporation, resulting in an increase in the corporation's taxable income. It does not affect the shareholder-employee's gross income.

Question 12

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 and personal taxes are filed together, and the income from the business is reported on Schedule C of the owner's personal tax return.

Question 13

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

Accepted Answer

Two exceptions are those expenses incurred in producing rent and royalty income.

Question 14

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

Accepted Answer

Unreimbursed employee expenses are classified as deductions from AGI while reimbursed employee expenses are classified as deductions for AGI.

Question 15

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

While Aaron's dividend income increases by $100,000,his salary income decreases by $100,000.Thus,his gross income does not change.Pigeon's gross income does increase by $100,000.

Question 16

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 value of the tax benefit to Mitch for the deduction from AGI may be less than that for the deduction for AGI.The value of the deduction for AGI for a taxpayer in the 28% bracket for a $2,000 expenditure is $560 ($2,000 × 28%).If Mitch takes the standard deduction rather than itemizing deductions,then the $2,000 expenditure that is classified as a deduction from AGI has no tax benefit.

Question 17

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

The amount paid for the 18-month period is not all deductible in the current tax year because the prepayment period extends substantially beyond the end of the tax year (i.e. ,must be capitalized).However,that portion of the prepaid rent which relates to September through December of the current tax year may be deducted in the current tax year.

Question 18

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

Accepted Answer

The Code does not have a clear definition of what activities constitute a trade or business. It relies on case law and facts and circumstances to determine whether an activity is a trade or business.

Question 19

Under the "one­year 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

If the one-year rule is not satisfied,the prepayment is prorated and deducted over the benefit period.

Question 20

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

Accepted Answer

Promising to pay or issuing a note does not satisfy the actually paid requirement.

Quiz 6: Deductions and Losses: in General

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

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

Depending on the nature of the expenditure,expenses incurred in a trade or business may be deductible for or from AGI.

Isabella owns two business entities.She may be able to use the cash method for one and the accrual method for the other.

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

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.

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

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.

Deductions are allowed unless a specific provision in the tax law provides otherwise.

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

The portion of a shareholderemployee's salary that is classified as unreasonable has no effect on the amount of a shareholderemployee's gross income,but results in an increase in the taxable income of the corporation.

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

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

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

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.

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.

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.

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

Under the "oneyear 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.

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

Quiz 6: Deductions and Losses: in General

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

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

Depending on the nature of the expenditure,expenses incurred in a trade or business may be deductible for or from AGI.

Isabella owns two business entities.She may be able to use the cash method for one and the accrual method for the other.

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

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.

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

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.

Deductions are allowed unless a specific provision in the tax law provides otherwise.

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

The portion of a shareholder­employee's salary that is classified as unreasonable has no effect on the amount of a shareholder­employee's gross income,but results in an increase in the taxable income of the corporation.

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

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

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

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.

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.

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.

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

Under the "one­year 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.

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

The portion of a shareholderemployee's salary that is classified as unreasonable has no effect on the amount of a shareholderemployee's gross income,but results in an increase in the taxable income of the corporation.

Under the "oneyear 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.