Exam 6: Deductions and Losses: in General

If a taxpayer makes a profit in three of the five consecutive years ending with the taxable year,the burden of proof is on the IRS to prove the activity is a hobby rather than a trade or business.

Generally,a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.

Which of the following statements is correct in connection with the investigation of a business?

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.

Fines paid in the course of carrying on a trade or business generally are deductible if there is a related business purpose.

Camille,a calendar year taxpayer,rented a building from Howard for use in her business on November 1,2010.Camille paid $30,000 for 15 months' rent and a $2,500 damage deposit.

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

Which of the following are deductions for AGI?

For purposes of the § 267 loss disallowance provision,a taxpayer's nephew is a related party.

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.

Because Scott is three months delinquent on the mortgage payments for his personal residence,Jeanette (his sister)is going to cover the arrearage.Based on past experience,she does not expect to be repaid by Scott.Which of the following statements is correct?

A taxpayer pays his son's real estate taxes.The taxpayer may deduct the real estate taxes,but the son cannot.

Gladys owns a retail hardware store in Tangipahoa.She is considering opening a business in Hammond,a community located 25 miles away.She incurs expenses of $60,000 in 2010 in investigating the feasibility and desirability of doing so.What amount can Gladys deduct in 2010 if the business is:

Woody owns a barber shop.The following selected data are taken from the barber shop balance sheet and income statement prepared for 2010 using the cash method. The following supplemental data also is provided. Calculate Woody's net profit for 2010 using the accrual method.

Distinguish between deductible bribes and nondeductible bribes.

Brenda invested in the following stocks and bonds during 2010. To finance the investments,she borrowed $100,000 from Swan Bank.Interest expense paid on the loan during 2010 was $6,000.During 2010,Brenda received $2,400 of dividend income from Green,Inc.and $3,200 of interest income on the municipal bonds.

Rex,a cash basis calendar year taxpayer,runs a bingo operation which is illegal under state law.During 2010,a bill designated H.R.9 is introduced into the state legislature which,if enacted,would legitimize bingo games.In 2010,Rex had the following expenses: Of these expenditures,Rex may deduct:

A political contribution to the Democratic Party or the Republican Party is not deductible,but a contribution to the Presidential Election Campaign Fund is deductible.

Priscella pursued a hobby of making bedspreads in her spare time.Her AGI before considering the hobby is $40,000.During the year she sold the bedspreads for $10,000.She incurred expenses as follows: Assuming that the activity is deemed a hobby,how should she report these items on her tax return?

Theo owns a vacation home that is classified in the personal use/rental use category.Rent income is $9,000,while property taxes and mortgage interest allocated to the rental use part are $12,000.Only $9,000 of the $12,000 expenses can be deducted.