Question 1

Which of the following must be capitalized by a business?

Accepted Answer

A)  Replacement of a windshield of a business truck which was broken in an accident. 
B)  Repair of a roof of a building used in business. 
C)  Amount paid for a covenant not to compete. 
D)  Only b. and c. must be capitalized. 
E)  a., b., and c. can be expensed rather than capitalized. 
A)  Replacement of a windshield of a business truck which was broken in an accident. 
B)  Repair of a roof of a building used in business. 
C)  Amount paid for a covenant not to compete. 
D)  Only b. and c. must be capitalized. 
E)  a., b., and c. can be expensed rather than capitalized.

Question 2

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2018, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2018, Rex had the following expenses:  
Of these expenditures, Rex may deduct:

Accepted Answer

A)  $247,000. 
B)  $250,000. 
C)  $258,000. 
D)  $282,000. 
E)  None of the above. 
A)  $247,000. 
B)  $250,000. 
C)  $258,000. 
D)  $282,000. 
E)  None of the above.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Are all personal expenses disallowed as deductions in 2018?

Accepted Answer

No. Selected personal expenses can be de

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

Andrew, who operates a laundry business, incurred the following expenses during the year.
? Parking ticket of $250 for one of his delivery vans that parked illegally.
? Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
? DUI ticket of $500 while returning from the rock concert.
? Attorney's fee of $600 associated with the DUI ticket.
What amount can Andrew deduct for these expenses?

Accepted Answer

A)  $0. 
B)  $250. 
C)  $600. 
D)  $1,425. 
E)  None of the above. 
A)  $0. 
B)  $250. 
C)  $600. 
D)  $1,425. 
E)  None of the above.

Question 7

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

Accepted Answer

A) True 
 B)False

Question 8

An expense need not be recurring in order to be "ordinary."

Accepted Answer

A) True 
 B)False

Question 9

Tom operates an illegal drug-running operation and incurred the following expenses:  
Which of the above amounts reduces his taxable income?

Accepted Answer

A)  $0. 
B)  $160,000. 
C)  $279,000. 
D)  $324,000. 
E)  None of the above. 
A)  $0. 
B)  $160,000. 
C)  $279,000. 
D)  $324,000. 
E)  None of the above.

Question 10

Which of the following legal expenses are deductible for AGI in 2018?

Accepted Answer

A)  Incurred in connection with a trade or business. 
B)  Incurred in connection with rental or royalty property held for the production of income. 
C)  Incurred for tax advice relative to the preparation of an individual's income tax return. 
D)  Only a. and b. qualify. 
E)  a., b., and c. qualify. 
A)  Incurred in connection with a trade or business. 
B)  Incurred in connection with rental or royalty property held for the production of income. 
C)  Incurred for tax advice relative to the preparation of an individual's income tax return. 
D)  Only a. and b. qualify. 
E)  a., b., and c. qualify.

Question 11

Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct these political contributions?

Accepted Answer

No. Politi

Question 12

Which of the following can be claimed as a deduction for AGI?

Accepted Answer

A)  Personal casualty losses. 
B)  Investment interest expenses. 
C)  Medical expenses. 
D)  Property taxes on personal use real estate. 
E)  None of the above. 
A)  Personal casualty losses. 
B)  Investment interest expenses. 
C)  Medical expenses. 
D)  Property taxes on personal use real estate. 
E)  None of the above.

Question 13

The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income producing factor in the business.

Accepted Answer

A) True 
 B)False

Question 14

Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the other.

Accepted Answer

A) True 
 B)False

Question 15

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 2018, heat pump sales are $400,000. Actual warranty expenses paid in 2018 are $40,000.
a. Determine the amount of the warranty expense deduction for 2018 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?

Accepted Answer

a. Even though Petula's business uses th

Question 16

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is a deduction for AGI?

Accepted Answer

A)  Contribution to a traditional IRA. 
B)  Roof repairs to a personal use home. 
C)  Safe deposit box rental fee in which stock certificates are stored. 
D)  Property tax on personal residence. 
E)  All of the above. 
A)  Contribution to a traditional IRA. 
B)  Roof repairs to a personal use home. 
C)  Safe deposit box rental fee in which stock certificates are stored. 
D)  Property tax on personal residence. 
E)  All of the above.

Question 18

In order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18- month lease for $36,000. The lease commences on October 1, 2018. How much of the $36,000 payment can she deduct in 2018 and 2019?
a. If Mella is an accrual basis taxpayer?
b. If Mella is a cash basis taxpayer?

Accepted Answer

a. As an accrual basis taxpayer, Mella c

Question 19

Trade or business expenses are classified as deductions for AGI. Section 212 expenses, barring certain exceptions, are classified as deductions from AGI. What are these exceptions?

Accepted Answer

The normal classification for § 212 expe

Question 20

If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.

Accepted Answer

A) True 
 B)False

Exam 6: Deductions and Losses: In General

Which of the following must be capitalized by a business?

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

Are all personal expenses disallowed as deductions in 2018?

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.

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

An expense need not be recurring in order to be "ordinary."

Tom operates an illegal drug-running operation and incurred the following expenses: Which of the above amounts reduces his taxable income?

Which of the following legal expenses are deductible for AGI in 2018?

Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct these political contributions?

Which of the following can be claimed as a deduction for AGI?

The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income producing factor in the business.

Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the other.

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Which of the following is a deduction for AGI?

Trade or business expenses are classified as deductions for AGI. Section 212 expenses, barring certain exceptions, are classified as deductions from AGI. What are these exceptions?

If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.

An Introduction to Taxation and Understanding the Federal Tax Law

Working with the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

Taxing Business Income

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Partnerships

S Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Income Taxation of Trusts and Estates

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