Exam 6: Deductions and Losses: in General

While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees, marketing survey, etc.) in exploring its business potential. Her parents have agreed to loan her the money required to start the business. What amount of these investigation costs can Angel deduct if: a. She opens the bookstore on August 1, 2014. b. She decides not to open the bookstore.

Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: Mortgage interest \ 9,000 Real estate taxes 3,000 Utilities 2,000 Maintenance 1,000 Insurance 500 Depreciation (rental part) 4,000 Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year.

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

Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct?

Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?

Cory incurred and paid the following expenses: Tax return preparation fee \6 00 Moving expenses 2,000 Investment expenses 500 Expenses associated with rental property 1,500 Interest expense associated with loan to finance tax-exempt bonds 400 Calculate the amount that Cory can deduct (before any percentage limitations).

Marsha is single, had gross income of $50,000, and incurred the following expenses: Charitable contribution \ 2,000 Taxes and interest on home 7,000 Legal fees incurred in a tax dispute 1,000 Medical expenses 3,000 Penalty on early withdrawal of savings 250 Her AGI is: a. $\$ 39,750$ . b. $\$ 49,750$ . c. $\$ 40,000$ . d. $\$ 39,750$ . e. $\text { None of the ahove }$

Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft. One negotiation is with a U.S. assistant secretary of defense. She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table. Another negotiation is with the minister of defense of a third world country. To complete the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment. Beige makes the payments and closes the deals. How much of these payments are deductible by Beige, Inc.?

Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows: Supplies \4 ,000 Interest on loan to get business started 500 Advertising 6,500 Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

Which of the following may be deductible?

Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To provide Olive with funds to acquire additional working capital, the shareholders each loan Olive $100,000 with a 6% interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

All domestic bribes (i.e., to a U.S. official) are disallowed as deductions.

Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income.

If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.

Janet is the CEO for Silver, Inc., a closely held corporation. Her total compensation for 2014 is $5 million. Of this amount, $2 million is a salary and $3 million is a bonus. The bonus was calculated as 5% of Silver's net income before the bonus and before taxes ($60 million X 5% = $3 million). The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver's performance. It is approved annually by the entire board of directors (1 of the 5 directors is an outside director) of Silver. How much of Janet's compensation can Silver deduct for 2014?

Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct?

In order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18-month lease for $36,000. The lease commences on October 1, 2014. How much of the $36,000 payment can she deduct in 2014 and 2015? a. If Mella is an accrual basis taxpayer? b. If Mella is a cash basis taxpayer?

Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: General representation in obtaining the divorce \1 ,500 Services in obtaining custody of the child 900 Services in settlement of martial property 600 Determining the tax consequences of: Dependency deduction for child 700 Property settlement 1,300 Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is:

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