Exam 6: Deductions and Losses in General

Petal,Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2016,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 2016 12,000 The amount of the deduction for bad debt expense for Petal for 2016 is:

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(Multiple Choice)

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Question 1

Correct Answer:

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Mattie and Elmer are separated and are in the process of obtaining a divorce.They incur legal fees 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. a.Determine the deductions for Mattie and for Elmer. b.Classify the deductions as for AGI and from AGI.

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Question 2

Correct Answer:

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a.Only the legal fees associated with the divorce that relate solely to tax advice are deductible.Therefore,Elmer may deduct the following:
Property settlement tax consequences
$1,500

If Mattie had paid her attorney,she could have deducted the following:
Determination of dependency exemptions
$1,500
Property settlement tax consequences
400
$1,900

However,since Elmer paid Mattie's lawyer,Mattie is ineligible to take the deduction.Likewise,Elmer is ineligible to take the deduction for this $1,900 since the obligation was that of Mattie. b.Any expenses that are deductible in this situation are classified as itemized deductions (i.e.,from AGI).

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.

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(True/False)

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Question 3

Correct Answer:

Verified

False

During 2015,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 2016.What is the amount of the deduction for salary expense?

(Multiple Choice)

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Question 4

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

(True/False)

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Question 5

The stock of Eagle,Inc.is owned as follows: Tom 23% Tom's uncle 22%-of-AGI 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.

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Question 6

Isabella owns two business entities.She may be able to use the cash method for one and the accrual method for the other.

(True/False)

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Question 7

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

(True/False)

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Question 8

Trade and business expenses should be treated as:

(Multiple Choice)

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Question 9

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 this year.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.

(True/False)

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Question 10

Paula is the sole shareholder of Violet,Inc.For 2016,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2016 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?

(Multiple Choice)

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Question 11

In distinguishing whether an activity is a hobby or a trade or business,discuss the presumptive rule.

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Question 12

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.

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Question 13

Tracy invested in the following stocks and bonds during 2016. 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 2016 was $5,000.During 2016,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.

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Question 14

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.

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Question 15

Olive,Inc. ,an accrual method taxpayer,is a corporation that is equally owned by Maurice and Alex,who are brothers.The corporation uses the accrual method of accounting and the shareholders use the cash method.To provide Olive with funds to acquire additional working capital,the shareholders each loan Olive $100,000 with a 6% interest rate.At the end of the tax year,there is unpaid accrued interest of $3,000 due to each shareholder.From a timing perspective,when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

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Question 16

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?

(Multiple Choice)

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Question 17

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).

(True/False)

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Question 18

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

(True/False)

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Question 19

Janet is the CEO for Silver,Inc. ,a closely held corporation.Her total compensation for 2016 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 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 (1 of the 5 directors is an outside director)of Silver.How much of Janet's compensation can Silver deduct for 2016?

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Question 20

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During 2015,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 2016.What is the amount of the deduction for salary expense?

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Isabella owns two business entities.She may be able to use the cash method for one and the accrual method for the other.

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

Trade and business expenses should be treated as:

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 this year.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.

Paula is the sole shareholder of Violet,Inc.For 2016,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2016 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?

In distinguishing whether an activity is a hobby or a trade or business,discuss the presumptive rule.

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).

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

An Introduction to Taxation and Understanding the Federal Law

Working With the Tax Law

Tax Formula and Tax Determination an Overview of Property Transactions

Gross Income Concepts and Inclusions

Gross Income Exclusions

Deductions and Losses Certain Business Expenses and Losses

Depreciation Cost Recovery Amortization and Depletion

Deductions Employee and Self Employed Related Expenses

Deduction and Losses Certain Itemized Deductions

Investor Losses

Alternative Minimum Tax

Tax Credits and Payment Procedures

Property Transactions Determination of Gain and Loss and Basic Considerations

Property Transactions Nontaxable Exchanges

Property Transactions Capital Gains and Losses

Property Transactions Section 1231 and Recapture Provisions

Accounting Periods and Methods

Deferred Compensation

Corporations and Partnerships

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