Deck 6: Deductions and Losses

Question 1

Charles is a single person,age 35,with no dependents.In 2016,Charles has gross income of $75,000 from his sole proprietorship.Charles also incurs $80,000 of deductible business expenses in connection with his proprietorship.He has interest and dividend income of $22,000.Charles has no itemized deductions.Charles's taxable income is

A)$6,650.
B)$10,700.
C)$12,950.
D)$17,000.

Answer 1

A

Question 2

A single taxpayer has adjusted gross income of $325,000 and has total itemized deductions in various categories totaling $20,000.The taxpayer discovers some additional deductions for AGI.The extra deductions will not affect his itemized deductions.

Answer 2

False

Question 3

Expenses incurred in connection with conducting a trade or business activity or in connection with generating investment income are generally deductible,but personal expenses are generally not deductible.

Answer 3

True

Question 4

In 2016,Venkat,who is single and age 37,received $60,000 of gross income and had $6,800 of itemized deductions.Venkat's taxable income is

A)$49,150.
B)$53,200.
C)$55,950.
D)$49,650.

Question 5

Generally,deductions for adjusted gross income on an individual's tax return include all the following types of expenses except those

A)incurred in gambling activities.
B)incurred in a trade or business.
C)incurred in the production of rent income.
D)incurred in the production of royalty income.

Question 6

A change to adjusted gross income cannot affect a taxpayer's itemized deductions.

Question 7

Itemized deductions are deductions for AGI.

Question 8

According to the tax formula,individuals can deduct the greater of for AGI deductions or from AGI deductions.

Question 9

Deductions for adjusted gross income include all of the following except

A)contributions to certain retirement plan arrangements.
B)alimony.
C)expenses attributable to production of rental income.
D)unreimbursed employee business expenses.

Question 10

Self-employed individuals may claim,as a deduction for adjusted gross income,50 percent of their

A)traditional IRA contributions.
B)disability insurance premiums.
C)health insurance premiums.
D)self-employment tax.

Question 11

Adjusted gross income (AGI)is the basis for a number of phase-outs of deductions.

Question 12

Expenses incurred in a trade or business generally are deductions for AGI.

Question 13

In 2016,Sean,who is single and age 44,received $55,000 of gross income and had $5,000 of deductions for AGI and $4,600 of itemized deductions.Sean's taxable income is

A)$39,650.
B)$43,700.
C)$45,400.
D)$41,350.

Question 14

On Form 1040,deductions for adjusted gross income include the amounts paid for all of the following except

A)alimony.
B)home mortgage interest.
C)student loan interest.
D)moving expenses.

Question 15

A deduction will be allowed for an expenditure unless the Internal Revenue Code specifically disallows it.

Question 16

A single individual with no dependents can deduct the larger of his itemized deductions or his personal exemption.

Question 17

Liz,who is single,lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate.Liz had the following items of income and expense during the current year. Income:
Expenses:
What is her adjusted gross income for the year?

A)$52,700
B)$61,100
C)$62,200
D)$68,000

Question 18

Deductions for AGI may be located

A)on the front page of Form 1040.
B)on Schedule C as a deduction.
C)on Schedule E as a deduction.
D)All of the above are true.

Question 19

Individuals are allowed to deduct the greater of the standard deduction or itemized deductions.

Question 20

Assume Congress wishes to encourage healthy eating and is considering a deduction for broccoli purchases.In order to maximize the value of this tax deduction for taxpayers,Congress should provide for a

A)miscellaneous itemized deduction.
B)deduction for AGI.
C)deduction from AGI.
D)All of the above would provide the same tax savings to taxpayers

Question 21

In order for an expense to be ordinary,it must be reasonable in amount and it must bear a reasonable and proximate relationship to the income-producing activity or property.

Question 22

Leigh pays the following legal and accounting fees during the year: What is the total amount of her for AGI deduction for these fees?

A)$10,800
B)$14,000
C)$15,000
D)$20,000

Question 23

During the current year,Donna,a single taxpayer,reports the following items income of income and expenses:
Income:
Expenses/losses:
Compute Donna's taxable income.(Show all calculations in good form. )

Question 24

During the current year,Martin purchases undeveloped land as an investment.Martin intends to rent the land as pastureland and hopefully sell it later for a profit.In the current year,Martin receives no rent but he does pay taxes of $2,800,mortgage interest of $900 and liability insurance of $500.How much of these expenses can Martin deduct (before any limitations)on his current tax return?

A)$0
B)$1,400
C)$3,700
D)$4,200

Question 25

List those criteria necessary for an expenditure to be deductible as business or investment expenses.

Question 26

Maria pays the following legal and accounting fees during the year: What is the total amount of her for AGI deduction for these fees?

A)$4,000
B)$6,000
C)$8,100
D)$11,200

Question 27

To be tax deductible,an expense must be all of the following except

A)ordinary and necessary.
B)paid in cash.
C)reasonable in amount.
D)an expense of the taxpayer.

Question 28

Laura,the controlling shareholder and an employee of Southtown Corporation,receives an annual salary of $750,000.Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably-sized corporations,the IRS contends that Laura's salary should be no higher than $600,000.The Court upheld the IRS's position.As a result,which of the following is true?

A)$600,000 is deductible by the corporation;$600,000 is taxable to Laura.
B)$600,000 is deductible by the corporation;$750,000 is taxable to Laura.
C)$750,000 is deductible by the corporation;$750,000 is taxable to Laura.
D)$750,000 is deductible by the corporation;$600,000 is taxable to Laura.

Question 29

Carole owns 75% of Pet Foods,Inc.As CEO,Carole must travel extensively and does so on the company jet.In addition,she also uses the jet to take several personal vacations.Carole reports the value of the personal use of the jet,$40,000,as additional compensation.Which of the following is true in terms of the corporation?

A)The corporation includes $40,000 as miscellaneous income.
B)The $40,000 has no impact on the corporation's income tax.
C)The corporation takes a deduction of $40,000 for compensation expense.
D)The corporation takes a deduction of $40,000 for dividend expense.

Question 30

A sole proprietor paid legal fees in connection with the acquisition of a building that he uses in his business.The sole proprietor can deduct the legal fees for AGI.

Question 31

During the current year,Lucy,who has a sole proprietorship,pays legal and accounting fees for the following:
Services rendered in resolving a federal tax deficiency
Tax return preparation fees:
What amount is deductible for AGI?

Question 32

Discuss why the distinction between deductions for AGI and from AGI is important to individuals.

Question 33

Fees paid to prepare a taxpayer's Schedule C of the tax return (Profit or Loss from Business)are for AGI deductions.

Question 34

Various criteria will disqualify the deduction of a business or investment related expenditure.Which of the following criteria will not disqualify a business or investment expenditure?

A)capital expenditure
B)expenses related to tax-exempt income
C)expenses are not incurred annually
D)expenses are illegal or in violation of public policy

Question 35

Generally,expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.

Question 36

An expense is considered necessary if it is "appropriate and helpful" in the taxpayer's business.

Question 37

Pamela was an officer in Green Restaurant which subsequently went bankrupt.Pamela started a new restaurant and,to establish goodwill,paid off the debts of $100,000 of Green Restaurant.She was under no obligation to do so.The $100,000 is

A)deductible currently as an itemized deduction.
B)capitalized because the expenses are not ordinary.
C)deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses.
D)None of the above.

Question 38

Mark and his brother,Rick,each own farms.Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle.Mark purchases $2,000 of feed and gives Rick one-half of the feed.Mark tells Rick that there is no need to repay him and to consider the feed a gift.Which of the following statements is true?

A)Mark can deduct $2,000 for the feed.
B)Mark can deduct $1,000 for the feed.
C)Rick must report $1,000 as income.
D)None of the above is true.

Question 39

Which of the following is not required for an expenditure to be deductible as a business or investment expense?

A)recurring in nature
B)ordinary and necessary
C)reasonable in amount
D)incurred by the taxpayer

Question 40

Desi Corporation incurs $5,000 in travel,market surveys,and legal expenses to investigate the feasibility of opening a new coffee house in one of the new suburban malls in town.Desi already owns a similar coffee house across town.
a.What is the proper tax treatment of these expenses if Desi decides not to open the new coffee house?
b.What is the proper tax treatment of these expenses if Desi decides to open the new coffee house?
c.Assume that Desi Corp is currently in the cleaning services business and incurs the noted expenses.because it is considering opening a coffee house.Reconsider your responses to parts a and b.

Question 41

Fines and penalties are tax deductible if related to the taxpayer's trade or business.

Question 42

Kickbacks and bribes paid to federal officials are deductible only if related to the taxpayer's trade or business.

Question 43

A sole proprietor contributes to the election campaign of a state governor.The candidate has promised to change a law that severely limits the growth of the sole proprietor's business.Given the direct benefit,the sole proprietor can deduct the contribution.

Question 44

Mickey has a rare blood type and sells his blood for payment on a regular basis.In order to maintain the quality of his blood,Mickey takes expensive vitamins and nutritional supplements.What tax issues should Mickey consider?

Question 45

Capital expenditures add to the value,substantially prolong the useful life,or restore the life property.

Question 46

During 2016 and 2017,Danny pays property taxes of $3,500 each year on a piece of land.During 2016,the land is vacant and unproductive.In 2017,Danny uses the land as a parking lot and generates $16,000 in income.Which of the following is true regarding the property taxes?

A)Capitalize $3,500 each year.
B)Deduct $3,500 each year.
C)Capitalize $3,500 in 2016 and deduct $3,500 in 2017.
D)Either B or C is acceptable.

Question 47

Jimmy owns a trucking business.During the current year he incurred the following: The fines for speeding were a necessary cost because missing deadlines would cause lost business and are ordinary in the industry.What is the total amount of deductible expenses?

A)$115,000
B)$123,000
C)$108,000
D)$144,000

Question 48

Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.

Question 49

Ronna is a professional golfer.In order to correct her vision,Ronna has eye surgery.The costs of the surgery and subsequent medical care are not covered by insurance.What tax issues should Ronna consider?

Question 50

Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible.

Question 51

Ben is a well-known professional football quarterback.His team's owners expect him to be a role model for young people.Any endorsement contracts that he receives are based on his reputation.In the current year,Ben is charged with assault.Ben hires an attorney to represent him in this matter.Ultimately,the charges are dismissed.What tax issues should Ben consider?

Question 52

Taxpayers may deduct lobbying expenses incurred to influence legislation at any governmental level if the legislation is of direct interest to the taxpayer's trade or business.

Question 53

Kaitlyn owns a hotel in Phoenix,Arizona.The city of Phoenix has proposed legislation to increase the hotel room tax.Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation.Kaitlyn can deduct the $1,000.

Question 54

Sacha,a dentist,has significant investment assets.She holds corporate bonds,municipal bonds,stocks and mutual funds.Sacha paid $1,500 to an investment adviser to conduct a portfolio review and to prepare a recommendation for rebalancing her portfolio.Which of the following statements is correct regarding the tax treatment of the $1,500 fee?

A)Sacha can include the full fee as an investment-related expense in her miscellaneous itemized deductions.
B)Sacha can include the full fee as an investment-related expense in her "for AGI" deductions.
C)Part of the $1,500 fee will be disallowed due to the holding of the municipal bonds.
D)The $1,500 fee is not deductible.

Question 55

A taxpayer opens a new business this year.Prior to opening,she incurred $45,000 of business investigation and preopening costs.The taxpayer can elect to currently deduct $5,000 and amortize the balance over 180 months.

Question 56

Which of the following factors is important in distinguishing between capital and revenue expenditures?

A)The expenditure improves the property,adding to the value of the property.
B)The expenditure provides a betterment,adding to the value of the property.
C)The expenditure restores the property.
D)All of the above.

Question 57

During the current year,Ivan begins construction of an office building and a hotel.He incurs $10,000 in property taxes during the construction of the office building and $15,000 for the hotel.Which of the following statements is true of the property taxes during the construction period?

A)Ivan must capitalize the property taxes on both properties each year if an election is made.
B)Ivan must deduct the property taxes on both properties each year.
C)Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year.
D)Ivan may elect to capitalize the property taxes for the properties in one year and then deduct the property taxes on the properties the next year.

Question 58

Kaitlyn owns a hotel in Phoenix,Arizona.The Arizona legislature has proposed legislation to increase the hotel room tax.Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation.Kaitlyn can deduct the $1,000.

Question 59

During the current year,the United States files criminal and civil actions against Joe,the CEO of Box Corporation,and Jane,the president of Cable Corporation,for price fixing.Both enter pleas of no contest and appropriate judgments are entered.Subsequent to this action,Square Corporation sues both Box and Cable for treble damages of $6,000,000.In settlement,Box and Cable each pay Square $1,200,000.What is the maximum amount that Box and Cable may each deduct?

A)$400,000
B)$1,200,000
C)$2,000,000
D)$6,000,000

Question 60

Emeril borrows $340,000 to finance taxable and tax-exempt investments.He incurs $18,000 investment interest expense,allocated equally between the taxable and tax-exempt investments.Ignore any possible investment interest expense limitation.How much of the interest expense is deductible,and where is it deductible?

A)$18,000 for AGI
B)$18,000 from AGI
C)$9,000 for AGI
D)$9,000 from AGI

Question 61

What must a taxpayer do to properly document a deductible travel or entertainment expense?

Question 62

Paul,a business consultant,regularly takes clients and potential clients out to dinner.In order to deduct these expenses,Paul must maintain records substantiating all of the following except:

A)the time and place of the dinners.
B)the business relationship with the person invited.
C)the business purpose of the dinners.
D)All of the above information must be substantiated in order to deduct the entertainment costs.

Question 63

A small business uses the accrual method of accounting for its financial statements.It must also use the accrual method for computing taxable income.

Question 64

Troy incurs the following expenses in his business,an illegal gambling establishment: His deductible expenses are

A)$0.
B)$200,000.
C)$330,000.
D)$380,000.

Question 65

Rachel has significant travel and entertainment expenses for her work,but she has not kept receipts.She will be able to deduct a reasonable amount of these ordinary and necessary expenses under the Cohan rule.

Question 66

Tory considered opening a cupcake store in Denver.He is not operating a similar business in any other location.After spending $8,600 on a market study,he decided against opening the store on August 1.What is the maximum amount of deduction for the current year attributable to this expenditure?

A)$0
B)$5,000
C)$5,600
D)$6,800

Question 67

Points paid in connection with the purchase of a principal residence may be deducted in the year paid.

Question 68

Super Development Company purchased land in the current year from Riverside Chemicals,Inc.The land was contaminated with harmful pollutants,so Super Development paid $1,000,000 to remove the contaminants.What tax issue(s)should be considered before Super files its current year tax return?

Question 69

During the current year,Charlene borrows $10,000 to purchase Kansas City bonds.Charlene incurs $800 of interest on her outstanding loan.How much interest expense may Charlene deduct in the current year?

Question 70

Accrual-basis taxpayers are allowed to deduct expenses when they meet either the economic performance test or the all-events test.

Question 71

Toby,owner of a cupcake shop in New York,had been considering opening a similar business (i.e. ,a cupcake shop)in Phoenix.After spending $6,800 investigating such possibilities in Phoenix,Toby decided against opening the store on July 1.What is the maximum amount of deduction for the current year attributable to these expenditures?

A)$0
B)$5,000
C)$5,600
D)$6,800

Question 72

Why can business investigation expenditures be deducted currently by a taxpayer who is engaged in a line of business similar to the one being investigated,while the same costs must be capitalized and amortized to be deductible by a taxpayer who is not engaged in a similar business?

Question 73

An accrual-basis taxpayer may elect to accrue real property taxes ratably over the period to which the taxes relate.

Question 74

Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.

Question 75

Expenses paid with a credit card are deductible at the time a cash-basis taxpayer pays for the charge.

Question 76

Pat,an insurance executive,contributed $1,000,000 to the re-election campaign of Governor Stephens,in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance.How much of the contribution can Pat deduct?

A)$0
B)$100,000
C)$500,000
D)$1,000,000

Question 77

In March of the current year,Marcus began investigating the possibility of opening a specialty clothing store.From March through June,he spent $2,300 on a market survey,$2,700 in consulting fees to find the best location and $3,600 in professional fees setting up an accounting and inventory system.Although he had never run his own business before,on August 1 he opened his doors for business.What is the maximum amount of deduction for the current year attributable to these expenditures?

A)$0
B)$5,000
C)$5,100
D)$8,600

Question 78

Jones,Inc. ,a calendar-year taxpayer,is in the air conditioner repair business.The business uses the cash method.In December of the current year,Jones charged $100 of supplies at Refrigeration,Inc. , (he will pay the credit card bill in January)and also purchased $600 of supplies at XYZ on open account (he will make a payment on the open account in January).What is the amount that is deductible by Jones,Inc. ,in the current year?

A)$100
B)$600
C)$700
D)The amounts must be capitalized and charged to expense as used.

Question 79

American Healthcare (AH),an insurance company,is trying to persuade Congress to enact nationwide anti-smoking legislation.As part of this effort,AH paid $500,000 to hire a lobbying firm to discuss its concerns with members of Congress.AH also contributed $100,000 to candidates for political office who support limiting public smoking.What amount of these expenditures can AH deduct?

A)$0
B)$100,000
C)$500,000
D)$600,000

Question 80

Eugene,a hardware store owner in Detroit,incurs $7,000 in an attempt to influence the Detroit City Council on the matter of a new tax assessment on hardware stores in Detroit.Explain what amount Eugene can deduct.