Exam 6: Deductions and Losses: In General

Marvin spends the following amounts on a house he owns: a. How much of these expenses can Marvin deduct if the house is his principal residence? b. How much of these expenses can Marvin deduct if he rents the house to a tenant? c. Classify any deductible expenses as deductions for AGI or as deductions from AGI.

Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable?

Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2018: Based on this information, Sammy has:

Sandra sold 500 shares of Wren Corporation to Bob, her brother, for its fair market value. She had paid $26,000 for the stock. Calculate Sandra's and Bob's gain or loss under the following circumstances: a. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $18,000. b. Sandra sold the shares to Bob for $30,000. One year later, Bob sold them for $27,000. c. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $28,000.

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

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.

Under the "twelve month rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year.

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

Walt wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them.

Describe the circumstances under which a taxpayer can receive rent income from a personal residence, but does not have to report it as gross income.

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.

Benita incurred a business expense on December 10, 2018, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2019. Which of the following is correct?

While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees, marketing survey, etc.) in exploring its business potential. Her parents have agreed to loan her the money required to start the business. What amount of these investigation costs can Angel deduct if: a. She opens the bookstore on August 1, 2018. b. She decides not to open the bookstore.

Max opened his dental practice (a sole proprietorship) in March 2018. 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?

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.

If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.

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.

Graham, a CPA, has submitted a proposal to do the annual audit for a municipality. Owen, the city treasurer, tells Graham that for a $1,000 fee, he will use his influence to have the audit awarded to Graham. What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?

Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if: a. She opens a new shop in Vero Beach. b. She decides not to open a new shop in Vero Beach.