Exam 6: Deductions and Losses: in General

Tracy invested in the following stocks and bonds during 2014. Blue, Inc. ^$25,000 City of Falcon bonds ^75,000 To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2014 was $5,000. During 2014, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on the municipal bonds. a. Determine the amount of Tracy's gross income. b. Determine the maximum amount of Tracy's deductible interest expense.

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

For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation?

If an item such as property taxes and home mortgage interest exceed the income from a hobby, the excess amount of this item over the hobby income can be deducted if the taxpayer itemizes deductions.

During the year, Rita rented her vacation home for twelve days for $2,400 and she used it personally for three months. The following expenses were incurred on the home: Property taxes \ 2,200 Mortgage interest 10,800 Utilities and maintenance 1,900 Depreciation 5,000 Insurance 900 Calculate her rental gain or loss and itemized deductions.

Which of the following must be capitalized by a business?

Hobby activity expenses are deductible from AGI to the extent of hobby income. Such expenses not in excess of hobby income are not subject to the 2% of AGI floor.

Which of the following is correct?

During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?

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

Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000. Beulah converts the property to rental use on November 1, 2014. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.

Walt wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them.

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.

Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business.

Petula's business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2014, heat pump sales are $400,000. Actual warranty expenses paid in 2014 are $40,000. a. Determine the amount of the warranty expense deduction for 2014 if Petula's business uses the accrual method. b. How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties which covered the second and third years of ownership?

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.

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

Which of the following can be claimed as a deduction for AGI?