Exam 6: Deductions and Losses: in General

Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during the year: Medical expenses \ 5,000 Alimony 24,000 Charitable contributions 2,000 Casualty loss (after \ 100 floor) 1,000 Mortgage interest on personal 4,500 Property taxes on personal residence 4,200 Moving expenses 2,500 Contribution to a traditional IRA 4,000 Sales taxes (no state or local income tax is imposed) 1,300 Calculate Austin's deductions for AGI.

Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?

If part of a shareholder/employee's salary is classified as unreasonable, determine the effect on the: a. Shareholder/employee's gross income. b. Corporation's taxable income.

If a taxpayer operates an illegal business, no deductions are permitted.

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.

The cost of legal advice associated with the preparation of an individual's Federal income tax return is not deductible because it is a personal expense.

Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge).

If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.

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

Which of the following is not a "trade or business" expense?

Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0. Based on this policy, Robin and Jeff each receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.

Tom operates an illegal drug-running operation and incurred the following expenses: Salaries \ 75,000 Illegal kickbacks 20,000 Bribes to border guards 25,000 Cost of goods sold 160,000 Rent 8,000 Interest 10,000 Insurance on furniture and fixtures 6,000 Utilities and telephone 20,000 Which of the above amounts reduces his taxable income? A) $\$ 0$ B) $\$ 160,000$ . C) $\$ 279,000$ . D) $\$324,000$ . E)None of the ahove

Sandra owns an insurance agency. The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. Revenue \ 250,000 Salaries and commissions 100,000 Rent 10,000 Insurance 5,000 Utilities 6,000 Accounts receivable, 1/1/2014 40,000 Accounts receivable, 12/31/2014 38,000 Accounts payable, 1/1/2014 12,000 Accounts payable, 12/31/2014 11,000 Calculate Sandra's net profit using the cash method for 2014.

Which of the following are deductions for AGI?

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.

Trade and business expenses should be treated as:

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.

Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2014, the following occur associated with bad debts. Credit sales \ 400,000 Collections on credit sales 250,000 Amount added to the reserve 10,000 Beginning balance in the reserve -0- Identifiable bad debts during 2014 12,000 The amount of the deduction for bad debt expense for Petal for 2014 is:

Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct these political contributions?

If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.