Exam 6: Deductions and Losses in General

Which of the following are deductions for AGI?

Under what circumstance can a bribe be deducted?

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

Max opened his dental practice (a sole proprietorship)in March 2016.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?

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?

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.

Assuming an activity is deemed to be a hobby,discuss the order and limits in which expenses must be deducted.

All domestic bribes (i.e. ,to a U.S.official)are disallowed as deductions.

Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Austin,a single individual with a salary of $100,000,incurred and paid the following expenses during the year: Medical expenses $ 5,000 Alimony 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.

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes,but is not allowed for a cash method taxpayer.

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

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2016,she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia.She acquires the South Carolina operations,but not the outlets in Georgia.As to these expenses,Iris should:

Are there any circumstances under which lobbying expenditures are deductible?

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

In determining whether an activity should be classified as a business or as a hobby,the satisfaction of the presumption (i.e. ,profit in at least 3 out of 5 years)ensures treatment as a business.

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,1/1/2016 40,000 Accounts receivable,12/31/2016 38,000 Accounts payable,1/1/2016 12,000 Accounts payable,12/31/2016 11,000 Calculate Sandra's net profit using the cash method for 2016.

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense.If the same amount is paid to the CEO of IBM,only $1 million is deductible.

Bobby operates a drug trafficking business.Because he has an accounting background,he keeps detailed financial records.What expenses can Bobby deduct on his Federal income tax return?