Exam 6: Deductions and Losses: in General

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.

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

For an activity classified as a hobby,the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g. ,depreciation,amortization,and depletion). (2) Amounts deductible under other Code sections without regard to the nature of the activity,such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit,but only if those amounts do not affect adjusted basis (e.g. ,maintenance,utilities,and supplies). If these expenses exceed the gross income from the activity and are thus limited,the sequence in which they are deductible is:

Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother,Shirley,for $160,000.Walter reinvests the proceeds in the stock market.Shirley holds the land for one year and a day and sells it in the marketplace for $169,000. a.​ Determine the tax consequences to Walter. b.Determine the tax consequences to Shirley.

If a vacation home is classified as primarily personal use (i.e. ,rented for fewer than 15 days),none of the related expenses can be deducted.

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.?

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 if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?

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.

Are there any circumstances under which lobbying expenditures are deductible?

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?

Depending on the nature of the expenditure,expenses incurred in a trade or business may be deductible for or from AGI.

Trade or business expenses are classified as deductions for AGI.Section 212 expenses,barring certain exceptions,are classified as deductions from AGI.What are these exceptions?

Martha rents part of her personal residence in the summer for 3 weeks for $3,000.Anne rents all of her personal residence for one week in December for $2,500.Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.

Bridgett's son,Clyde,is $12,000 in arrears on his residential mortgage payments.Of the $12,000,$7,500 represents interest and $4,500 represents principal. a.​ If Bridgett pays the $12,000 to the lender,how much can she deduct? How much can Clyde deduct? b.​ ​ If Bridgett pays the $7,500 of interest to the lender and loans or gives $4,500 to Clyde,who pays the $4,500 of principal,how much can Bridgett deduct? How much can Clyde deduct? c.​ If Bridgett gives or lends the $12,000 to Clyde who pays the lender,how much can he deduct? How much can Bridgett deduct? d.Advise Bridgett and Clyde on how the payment should be made.

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

Al is single,age 60,and has gross income of $140,000.His deductible expenses are as follows: Alimony $20,000 Charitable contributions 4,000 Contribution to a traditional IRA 5,500 Expenses paid on rental property 7,500 Interest on home mortgage and property taxes on personal residence 7,200 State income tax 2,200 ​ What is Al's AGI?

Which of the following is incorrect?

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

Max opened his dental practice (a sole proprietorship) in March 2015.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?

Tracy invested in the following stocks and bonds during 2015. 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 2015 was $5,000.During 2015,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.