Deck 6: Deductions: General Concepts and Trade or Business Deductions

Question 1

Premiums paid on a life insurance policy covering the life of an officer are a tax deductible business expense if the business is a direct or indirect beneficiary under the policy.

Answer 1

False
Premiums are deductible only if the business is not a direct or indirect beneficiary.

Question 2

In order to qualify for a moving expense deduction, it is necessary for a taxpayer to have a prior job location.

Answer 2

False
It is not necessary for a taxpayer to have a prior job location to qualify for a moving expense deduction.

Question 3

Rents and royalties expenses are deductible from adjusted gross income.

Answer 3

False
Rents and royalties expenses are deductible for AGI.

Question 4

Advance payments for employee services to be performed in future years are not deductible for tax purposes until the services are actually performed by the employees.

Question 5

In computing MACRS depreciation, salvage value is ignored.

Question 6

Job-seeking expenses are not deductible if an individual finds a job in a new trade or business.

Question 7

If an employee accounts to the employer for business-related expenses and is reimbursed by the employer, the expenses must still be reported on the employee's tax return.

Question 8

fte amount of a bad debt deduction is always limited to the adjusted basis of the debt in the hands of the taxpayer.

Question 9

Prepaid interest payments can be deducted in the year of payment regardless of whether the taxpayer uses the cash method or accrual method of accounting.

Question 10

fte Cohan case set a requirement for tax purposes that adequate substantiation is required for every tax deduction claimed on a tax return.

Question 11

Advertising which is intended to influence public reaction to proposed legislation normally is not a deductible business expense for tax purposes.

Question 12

A nonbusiness bad debt is always treated as a long-term capital loss for tax purposes.

Question 13

Transportation expenses are defined for tax purposes as the costs of transporting an employee from one location to another when the employee is not in a travel status.

Question 14

An ordinary expenditure is one which is commonly incurred by other businesses.

Question 15

Unreimbursed employee transportation expenses are deductible from AGI as miscellaneous itemized deductions.

Question 16

Hobby expenditures are deductible to the extent of hobby gross income.

Question 17

Tax deductions for tax planning and tax compliance expenses may only be claimed for expenses incurred in planning and compliance with respect to federal and state income taxes.

Question 18

Goodwill is subject to amortization for tax purposes.

Question 19

Full worthlessness of a debt must be proven in order to claim a business bad debt deduction.

Question 20

To qualify for the immediate expensing election under Section 179, eligible property must generally be tangible real property used in a trade or business and be eligible for MACRS.

Question 21

Taxpayers cannot deduct the costs of tickets to any entertainment activity or facility regardless of whether or not the taxpayer's attendance at the activity is related to business.

Question 22

Taxpayers can deduct the first $5,000 of start-up expenditures incurred during the first year of operations.

Question 23

fte depreciable life of land is dependent on the type of buildings that have been, or will be, constructed on the land.

Question 24

When a business borrows money to purchase tax-exempt bonds, the interest paid on the loan is not deductible.

Question 25

A necessary expense is one that is appropriate or helpful to the continuation of the taxpayer's business; ordinary refers to an expense that is customary and acceptable in the taxpayer's type of business.

Question 26

Amounts employers pay or reimburse employees for qualified moving expenses are taxable to employees and deducted by the employer.

Question 27

fte tax laws regarding depreciation allow taxpayers to write off the cost of tangible property over set periods regardless of the actual useful life of the property.

Question 28

Taxpayers can deduct ordinary and necessary expenses directly attributable to appearances before local legislative councils in connection with legislation that will, or may be expected to, affect the taxpayer's trade or business.

Question 29

fte research and experimental costs the taxpayer can elect to immediately expense include all such costs incident to the development or improvement of a product.

Question 30

Sales tax paid in connection with the purchase of property used in a business must be treated as part of the cost of the property.

Question 31

If a debt becomes worthless, the amount allowed as a bad deduction is the adjusted basis of the debt.

Question 32

Personal expenses are only deductible if the tax laws specifically state that they are.

Question 33

A taxpayer can expense the cost of acquiring a site for a laboratory as well as the costs of constructing a laboratory.

Question 34

fte portion of an employee's salary deemed "unreasonable" may be considered a dividend distribution to an employee that is also a shareholder of the corporation.

Question 35

A taxpayer can claim a transportation deduction equal to 50 cents per mile traveled in a passenger automobile for business purposes.

Question 36

Start-up costs can include expenditures incurred to investigate entering into or acquiring a new active trade or business.

Question 37

Acquisition costs a taxpayer incurs in the unsuccessful attempt to acquire a specific business cannot be deducted.

Question 38

A 50 percent deduction is allowed for amounts paid or incurred for dues and fees paid to social, athletic, sporting, or country clubs.

Question 39

fte taxpayer's domestic production activities deduction cannot exceed 25 percent of its W-2 wages.

Question 40

Amortization is the systematic recovery (expensing) of an investment in a productive natural resource.

Question 41

For individual taxpayers, deductible losses for tax purposes do not include:

A) Business losses
B) Investment losses
C) Personal losses
D) Personal casualty or theft losses

Question 42

fte averaging convention that applies to depreciable property in the year in which it is placed in service is not necessarily the same one used in the year is disposed of.

Question 43

Apartment buildings are an example of residential real property.

Question 44

Deductions for AGI are:

A) Always deductible
B) Deductible if they exceed the taxpayer's standard deduction
C) A flat allowance given to all taxpayers
D) Never deductible

Question 45

Percentage depletion is computed without regard to the adjusted basis of the property being depleted.

Question 46

Trucks, SUVs, or vans having a gross vehicle weight rating between 6,000 and 14,000 pounds are not subject to the annual depreciation limitations that apply to lighter vehicles.

Question 47

Tax planning and compliance expenses incurred by individual taxpayers are not:

A) Deductible as nonbusiness expenses
B) Deductible as miscellaneous itemized deductions
C) Limited to the income tax area
D) Itemized deductions

Question 48

Dealers in illegal drugs can deduct:

A) All ordinary and necessary business expenses
B) Cost of goods sold
C) Fines and penalties paid to the government for the violation of a law
D) None of the above

Question 49

If an expenditure is part business-related and part personal:

A) fte entire expenditure is deductible for tax purposes.
B) No part of the expenditure is deductible for tax purposes.
C) fte personal portion of the expenditure may be deductible for tax purposes.
D) Only the business-related portion of the expenditure is deductible for tax purposes.

Question 50

Fines and penalties paid to the government for the violation of a law are:

A) Generally deductible for tax purposes as business expenses
B) Not deductible for tax purposes
C) Deductible if ordinary and necessary
D) Deductible if reasonable in amount

Question 51

Cost depletion is computed based on the number of units sold during the year, regardless of the number of units extracted.

Question 52

Hobby expenditures are deductible to the extent of:

A) Total individual gross income
B) Hobby gross income
C) Trade or business gross income
D) Nonbusiness gross income

Question 53

Tangible assets are "depreciated;" intangible assets are "amortized."

Question 54

To be deductible for tax purposes, trade or business expenses must be:

A) Ordinary and necessary
B) Reasonable in amount
C) Related to an activity which is deemed to be a trade or business
D) All of the above

Question 55

Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business:

A) Only if the individual actually finds a new job
B) Regardless of whether the individual finds a new job
C) If the expenses relate to the individual's first job
D) Both (a) and (b)

Question 56

To be deductible for tax purposes, a trade or business expenditure must be:

A) Ordinary
B) Necessary
C) Ordinary and necessary
D) Ordinary or necessary

Question 57

For tax purposes, an asset does not necessarily need to decline in value to be a depreciable asset.

Question 58

Which of the following investment related expenses are deductible for AGI?

A) Safe deposit box rentals
B) Investment counseling fees
C) Rent and royalty expenses
D) Investment custodial fees

Question 59

For tax purposes, nonbusiness expenses are:

A) Investment expenses
B) Tax planning expenses
C) Tax compliance expenses
D) All of the above

Question 60

A Code Sec. 197 intangible is amortized based on its actual or estimated useful life.

Question 61

fte IRS takes the position that a taxpayer's tax home, for purposes of determining travel expenses, is at the location of the taxpayer's:

A) Principal place of business
B) Personal residence
C) Principal place of business or personal residence, whichever results in a lower tax deduction
D) Personal residence if located in excess of 50 miles from principal place of business

Question 62

A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayer's taxable income derived from the natural resource for the year before deducting the depletion deduction?

A) 50 percent
B) 65 percent
C) 75 percent
D) 85 percent

Question 63

In order to qualify for the moving expense deduction, the taxpayer:

A) Does not have to change job locations
B) Must move because of a new job location
C) Must have a prior job location
D) Must change employers

Question 64

For MACRS depreciation purposes, autos and light-duty trucks are depreciated over what period?

A) ftree years
B) Five years
C) Ten years
D) Fifteen years

Question 65

Which of the following types of taxes is not deductible?

A) State property taxes.
B) State income taxes.
C) Federal income taxes.
D) All of the above types of taxes are deductible.

Question 66

If rental payments are paid in advance, they are usually deductible by a taxpayer:

A) When paid
B) In the period covered by the payments
C) Over a one-year period
D) When paid or incurred as elected by the taxpayer

Question 67

Costs incurred in investigating the creation or acquisition of an active trade or business are classified as:

A) acquisition costs.
B) start-up costs.
C) organizational expenditures.
D) none of the above.

Question 68

Travel expenses must be incurred by a taxpayer while away from home. To the IRS, the term "away from home" means:

A) Away from home for a 24-hour period
B) Away from home temporarily
C) Away from home overnight
D) Away from home for a reasonable period of time

Question 69

fte Cohan rule has to do with:

A) Tax accounting methods
B) Debts of another taxpayer
C) Substantiation of deductions
D) Cash method of accounting

Question 70

Employee travel expenses are deductible:

A) For AGI
B) From AGI
C) For or from AGI depending on the type of travel expense
D) For AGI unless excess reimbursement is received

Question 71

A deduction for salaries and wages can include:

A) Bonus payments
B) Payments for services performed in prior years
C) Advance payments for services to be performed in future years
D) Both (a) and (b)

Question 72

Nonbusiness bad debts are deductible:

A) as short-term capital losses.
B) in full against business gross income.
C) only when they become wholly or partially worthless.
D) a and c are both correct.

Question 73

A business tax deduction for business gifts is restricted to $25 per year per:

A) Individual donor
B) Salesman
C) Business establishment
D) Individual donee

Question 74

A nonbusiness bad debt is deductible for tax purposes as a(n):

A) Short-term capital loss
B) Itemized deduction
C) Long-term capital loss
D) Ordinary business deduction

Question 75

fte tax laws allow taxpayers to use which of the following methods of accounting for research and experimental costs paid or incurred in connection with a trade or business?

A) Deduct the expenses in the year in which they are paid or incurred.
B) Capitalize the expenses and amortize them ratably over a period of at least 60 months beginning in the month that the benefits are first realized.
C) Capitalize the expenses, but do not amortize them.
D) All of the above.

Question 76

For tax purposes, the term "research and experimentation expenditures" includes which of the following:

A) Efficiency surveys
B) Development of a plant process
C) Management studies
D) Advertising

Question 77

Business depreciable property placed in service prior to what year is not eligible for ACRS depreciation?

A) 1978
B) 1980
C) 1981
D) 1982

Question 78

Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than:

A) 30 months
B) 60 months
C) 90 months
D) 120 months

Question 79

A business bad debt is deductible for tax purposes as a(n):

A) Short-term capital loss
B) Itemized deduction
C) Long-term capital loss
D) Ordinary business deduction

Question 80

Under the cash method of tax accounting, tax deductions are taken when:

A) Expenditures are made
B) ftere is a fixed and determinable liability
C) fte taxpayer elects to take the deduction
D) None of the above