Deck 6: Deductions and Losses: in General

Question 1

Deductions are allowed unless a specific provision in the tax law provides otherwise.

Answer 1

False

Question 2

Mitch is in the 28% 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 $1,000 expenditure that is classified as a deduction for AGI.

Answer 2

True

Question 3

Only some employment related expenses are classified as deductions for AGI.

Answer 3

True

Question 4

The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business).

Question 5

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

Question 6

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 7

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

Question 8

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Question 9

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

Question 10

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Question 11

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.

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

Under the "one-year 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 17

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

Question 18

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

Question 19

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

Question 20

Alice incurs qualified moving expenses of $12,000.If she is reimbursed by her employer,the deduction is classified as a deduction for AGI.If not reimbursed,the deduction is classified as an itemized deduction.

Question 21

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

Question 22

If an item such as property taxes and home mortgage interest exceed the income from a hobby,the excess amount of this item over the hobby income can be deducted if the taxpayer itemizes deductions.

Question 23

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

Question 24

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

Question 25

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.

Question 26

A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.

Question 27

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.

Question 28

The legal cost of having a will prepared is not deductible.

Question 29

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 30

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

Question 31

Legal expenses incurred in connection with rental property are deductions from AGI.

Question 32

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

Question 33

The cost of legal advice associated with the preparation of an individual's Federal income tax return is not deductible because it is a personal expense.

Question 34

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 35

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 36

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 37

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.

Question 38

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 39

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

Question 40

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 41

A vacation home at the beach which is rented for 200 days and used personally for 16 days is classified in the personal/rental use category.

Question 42

Hobby activity expenses are deductible from AGI to the extent of hobby income.Such expenses not in excess of hobby income are not subject to the 2%-of-AGI floor.

Question 43

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 44

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

Question 45

Al is single,age 60,and has gross income of $140,000.His deductible expenses are as follows:
​

What is Al's AGI?

A)$94,100.
B)$103,000.
C)$107,000.
D)$127,000.
E)None of the above.

Question 46

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

Question 47

If a vacation home is classified as primarily rental use,a deduction for all of the rental expenses is allowed.

Question 48

Sammy,a calendar year cash basis taxpayer who is age 66,has the following transactions in 2017:
​

Based on this information,Sammy has:

A)AGI of $90,000.
B)AGI of $95,000.
C)AGI of $99,500.
D)Deduction for medical expenses of $0.
E)None of the above.

Question 49

If a vacation home is classified as primarily personal use (i.e.,rented for fewer than 15 days),none of the related expenses can be deducted.

Question 50

Martha rents part of her personal residence in the summer for 3 weeks for $3,000.Anne rents all of her personal residence for one week in December for $2,500.Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.

Question 51

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

Question 52

Trade and business expenses should be treated as:

A)A deduction from AGI subject to the 2%-of-AGI floor.
B)A deduction from AGI not subject to the 2%-of-AGI-of-AGI floor.
C)Deductible for AGI.
D)An itemized deduction if not reimbursed.
E)None of the above.

Question 53

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.

Question 54

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

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 55

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

Question 56

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 gain of Marge).

Question 57

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.

Question 58

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.

Question 59

Marsha is single,had gross income of $50,000,and incurred the following expenses:
​

Her AGI is:

A)$43,000.
B)$49,750.
C)$40,000.
D)$39,750.
E)None of the above.

Question 60

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.

Question 61

Which of the following is not a "trade or business" expense?

A)Interest on business indebtedness.
B)Property taxes on business property.
C)Parking ticket paid on business auto.
D)Depreciation on business property.
E)All of the above are "trade or business" expenses.

Question 62

Which of the following may be deductible?

A)Bribes that relate to a U.S. business.
B)Fines paid for violations of the law.
C)Interest on a loan used in a hobby.
D)All of the above.
E)None of the above.

Question 63

Which of the following are deductions for AGI?

A)Mortgage interest on a personal residence.
B)Property taxes on a personal residence.
C)Mortgage interest on a building used in a business.
D)Fines and penalties incurred in a trade or business.
E)None of the above.

Question 64

During 2016,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 2017.What is the amount of the deduction for salary expense?

A)If Silver uses the cash method, $175,000 in 2016 and $0 in 2017.
B)If Silver uses the cash method, $0 in 2016 and $195,000 in 2017.
C)If Silver uses the accrual method, $175,000 in 2016 and $20,000 in 2017.
D)If Silver uses the accrual method, $195,000 in 2016 and $0 in 2017.
E)None of the above is correct.

Question 65

Rex,a cash basis calendar year taxpayer,runs a bingo operation which is illegal under state law.During 2017,a bill designated H.R.9 is introduced into the state legislature which,if enacted,would legitimize bingo games.In 2017,Rex had the following expenses:
Of these expenditures,Rex may deduct:

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

Question 66

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).
If these expenses exceed the gross income from the activity and are thus limited,the sequence in which they are deductible is:

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

Question 67

Priscella pursued a hobby of making bedspreads in her spare time.Her AGI before considering the hobby is $40,000.During the year she sold the bedspreads for $10,000.She incurred expenses as follows:
​

Assuming that the activity is deemed a hobby,how should she report these items on her tax return?

A)Include $10,000 in income and deduct $11,000 for AGI.
B)Ignore both income and expenses since hobby losses are disallowed.
C)Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions.
D)Include $10,000 in income and deduct interest of $500 for AGI.
E)None of the above.

Question 68

Which of the following statements is correct in connection with the investigation of a business?

A)If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned.
B)Expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired.
C)That business must be related to the taxpayer's present business for any expense ever to be deductible.
D)Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized.
E)None of the above.

Question 69

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2017,she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia.She acquires the South Carolina operations,but not the outlets in Georgia.As to these expenses,Iris should:

A)Capitalize $14,000 and not deduct $9,000.
B)Expense $23,000 for 2017.
C)Expense $9,000 for 2017 and capitalize $14,000.
D)Capitalize $23,000.
E)None of the above.

Question 70

Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?

A)Whether the activity is enjoyed by the taxpayer.
B)The expertise of the taxpayers or their advisers.
C)The time and effort expended.
D)The relationship of profits earned and losses incurred.
E)All of the above are relevant factors.

Question 71

Which of the following is a required test for the deduction of a business expense?

A)Ordinary
B)Necessary
C)Reasonable
D)All of the above
E)None of the above

Question 72

Petal,Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2017,the following occur associated with bad debts.
The amount of the deduction for bad debt expense for Petal for 2017 is:

A)$10,000.
B)$12,000.
C)$22,000.
D)$140,000.
E)None of the above.

Question 73

Payments by a cash basis taxpayer of capital expenditures:

A)Must be expensed at the time of payment.
B)Must be expensed by the end of the first year after the asset is acquired.
C)Must be deducted over the actual or statutory life of the asset.
D)Can be deducted in the year the taxpayer chooses.
E)None of the above.

Question 74

Paula is the sole shareholder of Violet,Inc.For 2017,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2017 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?

A)Paula's gross income will increase by $100,000 as a result of the IRS adjustment.
B)Violet's taxable income will not be affected by the IRS adjustment.
C)Paula's gross income will decrease by $100,000 as a result of the IRS adjustment.
D)Violet's taxable income will decrease by $100,000 as a result of the IRS adjustment.
E)None of the above is correct.

Question 75

Andrew,who operates a laundry business,incurred the following expenses during the year.

What amount can Andrew deduct for these expenses?

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

Question 76

Which of the following is a deduction for AGI?

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 77

Which of the following is incorrect?

A)Alimony is a deduction for AGI.
B)The expenses associated with royalty property are a deduction from AGI.
C)Contributions to a traditional IRA are a deduction for AGI.
D)Property taxes on taxpayer's personal residence are a deduction from AGI
E)All of the above are correct.

Question 78

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

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

Question 79

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?

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 80

Tommy,an automobile mechanic employed by an auto dealership,is considering opening a fast food franchise.If Tommy decides not to acquire the fast food franchise,any investigation expenses are:

A)A deduction for AGI.
B)A deduction from AGI, subject to the 2 percent floor.
C)A deduction from AGI, not subject to the 2 percent floor.
D)Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
E)Not deductible.