Exam 6: Deductions and Losses in General

Petula's business sells heat pumps which have a one-year warranty.Based on historical data,the warranty costs amount to 11% of sales.During 2016,heat pump sales are $400,000.Actual warranty expenses paid in 2016 are $40,000. a.Determine the amount of the warranty expense deduction for 2016 if Petula's business uses the accrual method. b.How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties which covered the second and third years of ownership?

Discuss the application of the "one-year rule" on prepayments by a cash basis taxpayer.

Which of the following is incorrect?

Susan is a sales representative for a U.S.weapons manufacturer.She makes a $100,000 "grease" payment to a U.S.government official associated with a weapons purchase by the U.S.Army.She makes a similar payment to a Saudi Arabian government official associated with a similar sale.Neither of these payments is deductible by Susan's employer.

In applying the $1 million limit on deducting executive compensation,what corporations are subject to the deduction limit? What executives are covered?