Exam 6: Deductions and Losses: in General

Graham, a CPA, has submitted a proposal to do the annual audit for a municipality. Owen, the city treasurer, tells Graham that for a $1,000 fee, he will use his influence to have the audit awarded to Graham. What factors are relevant in determining whether Graham can deduct the $1,000 payment assuming he pays the fee to Owen?

If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.

Alice incurs qualified moving expenses of $12,000 in 2019. If she is not reimbursed by her employer, the deduction is classified as a deduction for AGI.

Janet is the CEO for Silver, Inc., a closely held corporation. Her total compensation for 2019 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 of $60 million before the bonus and before taxes ($60 million × 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 (one of the five directors is an outside director) of Silver. How much of Janet's compensation can Silver deduct for 2019?

Payments by a cash basis taxpayer of capital expenditures:

Can a trade or business expense be deductible if it is necessary but not ordinary?

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.?

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.

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

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

Investment related expenses, such as paying a fee to an investment manager, generally are deductions from adjusted gross income in 2019.

Are there any exceptions to the rule that personal expenditures cannot be deducted?

If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense.

For a vacation home to be classified in the personal/rental use category, what attributes must be present?

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, 2019. How much of the $36,000 payment can she deduct in 2019 and 2020? a. If Mella is an accrual basis taxpayer? b. If Mella is a cash basis taxpayer?

The legal cost of having a will prepared is not deductible.

Max opened his dental practice (a sole proprietorship) in March 2019. At the end of the year, he has unpaid accounts receivable of $62,000 and no unpaid accounts payable. Should Max use the accrual method or the cash method for his dental practice?

The stock of Eagle, Inc. is owned as follows: Tom 23\% Tom's uncle 22\% Tom's daughter 7\% Tom's sister 15\% Tom's spouse 15\% Tom's nephew 8\% Tom's CPA, unrelated 10\% Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate Tom's realized and recognized loss associated with the sale.

Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during 2019: Medical expenses \ 5,000 Alimony (divorce finalized in 2019) 24,000 Charitable contributions 2,000 Casualty loss (after \ 100 floor) 1,000 Mortgage interest on personal residence 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.

If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions.