Exam 6: Deductions and Losses: in General

Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.

Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S. citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible while that by Jacques is not.

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug-running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Terry Jim Employee salaries \ 200,000 \ 200,000 Bribes to police 25,000 25,000 Rent and utilities 50,000 50,000 Cost of goods sold -0- 125,000 Which of the following statements is correct?

Albie operates an illegal drug-running business and has the following items of income and expense. What is Albie's adjusted gross income from this operation? Income \8 00,000 Expenses: Rent 24,000 Utilities 9,000 Bribes to police 55,000 Medical expense 5,000 Legal fees 25,000 Depreciation 30,000 Illegal kickbacks 30,000 Cost of goods sold 300,000

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, 1/1/2019 40,000 Accounts receivable, 12/31/2019 38,000 Accounts payable, 1/1/2019 12,000 Accounts payable, 12/31/2019 11,000 Calculate Sandra's net profit using the cash method for 2019.

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

What losses are deductible by an individual taxpayer?

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.

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

Melba incurred the following expenses for her dependent daughter during the current year: Payment of principal on daughter's automobile loan \ 3,600 Payment of interest on daughter's automobile loan 2,900 Payment of daughter's property taxes 1,800 Payment of principal on daughter's personal residence loan 2,800 Payment of interest on daughter's personal residence loan 7,000 How much may Melba deduct in computing her itemized deductions?

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.

The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income-producing factor in the business.

In a related-party transaction where realized loss is disallowed, when can the disallowed loss be used by the buyer on the subsequent sale of the property? In the case of a related-party disallowed loss transaction, can the related- party seller's disallowed loss be used by a taxpayer other than the related-party buyer?

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:

During 2018, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2019. What is the amount of the deduction for salary expense?

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

On January 2, 2019, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2019?

Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees in 2019 for their respective attorneys with the expenses being itemized as follows: For Mattie Elmer General costs of the divorce \ 3,500 \ 3,000 Determination of dependency exemptions 1,500 -0- Property settlement tax consequences 400 1,500 \5 ,400 \4 ,500 Although there is no requirement that he do so, Elmer pays Mattie's lawyer as a gesture of the positive feelings he still has for her. Determine the deductions for Mattie and for Elmer.

Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast-food franchise. If Tommy decides not to acquire the fast-food franchise, any investigation expenses are:

Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2019, the following associated with bad debts occur . 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 2019 12,000 The amount of the deduction for bad debt expense for Petal for 2019 is: