Deck 5: Business Deductions

Question 1

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes but is not allowed for a cash method taxpayer.

Answer 1

False

Question 2

None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business.

Question 6

If a taxpayer operates an illegal business, no deductions are permitted.

Question 7

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.

Question 8

The Code does not specifically define what constitutes a trade or business.

Question 9

Jacques, who is not a U.S.citizen, makes a contribution to the campaign of a candidate for governor.Cassie, a U.S.citizen, also makes a contribution to the same campaign fund.If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible while that by Jacques is not.

Question 10

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.

Question 11

All domestic bribes (i.e., to a U.S.official) are disallowed as deductions.

Question 12

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.

Question 13

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.

Question 14

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

Question 15

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.

Question 16

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

Question 17

Under the 12-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.

Question 18

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

Question 19

Two-thirds of treble damage payments under the antitrust law are not deductible.

Question 20

The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of the shareholder-employee's gross income but results in an increase in the taxable income of the corporation.

Question 21

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.

Question 22

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

Question 23

If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months.

Question 24

For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.

Question 25

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

Question 26

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.

Question 27

On December 20, 2019, the directors of Quail Corporation (an accrual basis, calendar year C corporation) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity.The payment, which is made on April 6, 2020, may be claimed as a deduction for tax year 2019.

Question 28

If a publicly traded corporation hires a new CEO in 2019 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000.

Question 29

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2018 of $5,000.In 2019, Heron made a further charitable contribution of $20,000.Heron's 2019 deduction is limited to $15,000 (10% of taxable income).The 2019 contribution must be applied first against the $15,000 limitation.

Question 30

Marge sells land to her adult son, Jason, for its $20,000 appraised value.Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000, and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized lossof Marge).

Question 31

Property that is classified as personalty may be depreciated.

Question 32

The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and board of directors.

Question 33

Land improvements are generally not eligible for cost recovery.

Question 34

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting five years ago for $10,000.Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Question 35

Purchased goodwill must be capitalized but can be amortized over a 60-month period.

Question 36

In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research.Crow had held the property for four months as inventory.Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

Question 37

Research and experimental expenditures do not include the cost of consumer surveys.

Question 38

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

Question 39

The key date for calculating cost recovery is the date the asset is placed in service.

Question 40

The cost of depreciable property is not a research and experimental expenditure.

Question 41

The § 179 deduction can exceed $1,020,000 in 2019 if the taxpayer had a § 179 amount that exceeded the taxable income limitation in the prior year.

Question 42

For personal property placed in service in 2019, the § 179 maximum deduction is $1,020,000.

Question 43

The factor for determining the cost recovery for eligible real estate under MACRS in the year of disposition is taken from the month of the disposition.

Question 44

Under the MACRS straight-line election for personalty, only the half-year convention is applicable.

Question 45

The cost recovery period for three-year class property is four years.

Question 46

New and used personal property placed in service in 2019 and used in a trade or business qualifies for additional first-year depreciation.

Question 47

Motel buildings have a cost recovery period of 27.5 years.

Question 48

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

Question 49

Property used for the production of income is not eligible for § 179 expensing.

Question 50

Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.

Question 51

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000 even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

Question 52

The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.

Question 53

If more than 40% of the value of property other than real property is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

Question 54

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

Question 55

If an automobile is placed in service in 2019, the limitation for cost recovery in 2021 will be based on the cost recovery limits for the year 2019.

Question 56

Taxpayers may elect to use the straight-line method under MACRS for personalty.

Question 57

The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used.

Question 58

Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.

Question 59

For a new car that is used predominantly in business, the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation.

Question 60

The luxury auto cost recovery limits applies to all automobiles.

Question 61

A used $35,000 automobile that is used 100% for business is placed in service in 2019.If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured.

Question 62

The inclusion amount for a leased automobile is adjusted by a business usage percentage.

Question 63

If a taxpayer has a business with a net operating loss carryover reducing current year income, the taxpayer may want to elect to use straight-line depreciation to slow down the cost recovery.

Question 64

The amortization period for $58,000 of startup expenses is 180 months.

Question 65

Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.

Question 66

Under MACRS, equipment falling in the 7-year MACRS class will be cost recovered over seven tax years.

Question 67

All listed property is subject to the substantiation requirements of § 274.

Question 68

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

Question 69

Intangible drilling costs are capitalized and recovered through depletion.

Question 70

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

Question 71

A taxpayer must use the alternative depreciation system (ADS) to compute depreciation for earnings and profits.

Question 72

Assets that do not have a determinable useful life are not eligible for cost recovery under MACRS.

Question 73

Under MACRS, the double-declining balance method is used for property other than real estate with a recovery period of 15 or 20 years.

Question 74

Goodwill associated with the acquisition of a business cannot be amortized.

Question 75

For real property, the ADS convention is the mid-month convention.

Question 76

If startup expenses total $53,000, $51,000 of those costs are amortized over 180 months.

Question 77

When a business is being purchased, if possible, the purchaser should bargain for more of the purchase price being allocated to goodwill and covenants not to compete rather than depreciable assets.

Question 78

The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years.

Question 79

Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.

Question 80

A purchased trademark is a § 197 intangible.