Question 1

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

Accepted Answer

The two tests that an accrual basis taxp

Question 2

Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees in 2018 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.
Determine the deductions for Mattie and for Elmer.

Accepted Answer

None of the legal expenses are

Question 3

Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

Accepted Answer

A) True 
 B)False

Question 4

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

Accepted Answer

A) True 
 B)False

Question 5

If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense.

Accepted Answer

A) True 
 B)False

Question 6

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses.  
Which of the following statements is correct?

Accepted Answer

A)  Neither Terry nor Jim can deduct any of the above items in calculating the business profit. 
B)  Terry should report profit from his business of $250,000. 
C)  Jim should report profit from his business of $500,000. 
D)  Jim should report profit from his business of $250,000. 
E)  None of the above. 
A)  Neither Terry nor Jim can deduct any of the above items in calculating the business profit. 
B)  Terry should report profit from his business of $250,000. 
C)  Jim should report profit from his business of $500,000. 
D)  Jim should report profit from his business of $250,000. 
E)  None of the above.

Question 7

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?

Accepted Answer

(1) The expenses of investigation may be

Question 8

During 2017, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2018. What is the amount of the deduction for salary expense?

Accepted Answer

A)  If Silver uses the cash method, $175,000 in 2017 and $0 in 2018. 
B)  If Silver uses the cash method, $0 in 2017 and $195,000 in 2018. 
C)  If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018. 
D)  If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018. 
E)  None of the above is correct. 
A)  If Silver uses the cash method, $175,000 in 2017 and $0 in 2018. 
B)  If Silver uses the cash method, $0 in 2017 and $195,000 in 2018. 
C)  If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018. 
D)  If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018. 
E)  None of the above is correct.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions.

Accepted Answer

A) True 
 B)False

Question 11

Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows:  
Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

Accepted Answer

A)  $0. 
B)  $6,000. 
C)  $8,000. 
D)  $12,000. 
E)  None of the above. 
A)  $0. 
B)  $6,000. 
C)  $8,000. 
D)  $12,000. 
E)  None of the above.

Question 12

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Accepted Answer

A) True 
 B)False

Question 13

For an activity classified as a hobby, the expenses are categorized as follows:
(1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion).
(2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest.
(3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies).
For tax years before 2018, if these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is:

Accepted Answer

A)  (1), (2), (3). 
B)  (1), (3), (2). 
C)  (2), (3), (1). 
D)  (2), (1), (3). 
E)  (3), (2), (1). 
A)  (1), (2), (3). 
B)  (1), (3), (2). 
C)  (2), (3), (1). 
D)  (2), (1), (3). 
E)  (3), (2), (1).

Question 14

Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during 2018:
   
Calculate Austin's deductions for AGI.

Accepted Answer

Only the following expenses ar

Question 15

In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct?

Accepted Answer

A)  No income is included in AGI. 
B)  No expenses are deductible. 
C)  Expenses must be allocated between rental and personal use. 
D)  Only a. and b. are correct. 
E)  a., b., and c. are correct. 
A)  No income is included in AGI. 
B)  No expenses are deductible. 
C)  Expenses must be allocated between rental and personal use. 
D)  Only a. and b. are correct. 
E)  a., b., and c. are correct.

Question 18

For a president of a publicly held corporation hired in 2018, which of the following are not subject to the $1 million limit on executive compensation?

Accepted Answer

A)  Contribution to medical insurance plan. 
B)  Contribution to pension plan. 
C)  Premiums on group term life insurance of $50,000. 
D)  Only b. and c. are not subject to the limit. 
E)  a., b., and c., are not subject to the limit. 
A)  Contribution to medical insurance plan. 
B)  Contribution to pension plan. 
C)  Premiums on group term life insurance of $50,000. 
D)  Only b. and c. are not subject to the limit. 
E)  a., b., and c., are not subject to the limit.

Question 19

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

Accepted Answer

The $1 million limit on deducting the co

Question 20

Arnold and Beth file a joint return in 2018. Use the following data to calculate their deduction for AGI.

Accepted Answer

Arnold and Beth's deduction for AGI is $

Exam 6: Deductions and Losses: In General

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

Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense.

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Which of the following statements is correct?

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?

During 2017, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2018. What is the amount of the deduction for salary expense?

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

If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions.

Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during 2018: Calculate Austin's deductions for AGI.

In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business.

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

If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct?

For a president of a publicly held corporation hired in 2018, which of the following are not subject to the $1 million limit on executive compensation?

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

Arnold and Beth file a joint return in 2018. Use the following data to calculate their deduction for AGI.

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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