Exam 6: Deductions and Losses: in General

Aaron,a shareholder-employee of Pigeon,Inc. ,receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.

Are there any circumstances under which lobbying expenditures are deductible?

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

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

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.?

If an item such as property taxes and home mortgage interest exceed the income from a hobby,the excess amount of this item over the hobby income can be deducted if the taxpayer itemizes deductions.

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.

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

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

Trade and business expenses should be treated as:

Which of the following is a required test for the deduction of a business expense?

During the year,Martin rented his vacation home for three months and spent one month there.Gross rental income from the property was $5,000.Martin incurred the following expenses: mortgage interest,$3,000;real estate taxes,$1,500;utilities,$800;maintenance,$500;and depreciation,$4,000.Compute Martin's allowable deductions for the vacation home.

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

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: 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.

Which of the following is a deduction for AGI (itemized deduction)?

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.

Two-thirds of treble damage payments under the antitrust law are not deductible.

Purchased goodwill must be capitalized,but can be amortized over a 60-month period.

Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition,if (1)the business is not acquired;and (2)the business is acquired?

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.