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Terms in this set (180)
True
The value of the tax benefit to Mitch for the deduction from AGI may be less than that for the deduction for AGI. The value of the deduction for AGI for a taxpayer in the 24% bracket for a $2,000 expenditure is $480 ($2,000 × 24%). If Mitch takes the standard deduction rather than itemizing deductions, then the $2,000 expenditure that is classified as a deduction from AGI has no tax benefit.
The value of the tax benefit to Mitch for the deduction from AGI may be less than that for the deduction for AGI. The value of the deduction for AGI for a taxpayer in the 24% bracket for a $2,000 expenditure is $480 ($2,000 × 24%). If Mitch takes the standard deduction rather than itemizing deductions, then the $2,000 expenditure that is classified as a deduction from AGI has no tax benefit.
Only under limited circumstances can a loss on the sale of a personal use asset be deducted.T/FFalse,
Under no circumstance can a personal deduction be deducted.The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business).T/FTrueDepending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI.FalseSuch expenses are deductible for AGI.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.False
The accrual method must be used in these cases unless the gross receipts test is met.. A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting. T/FFalse
Promising to pay or issuing a note does not satisfy the actually paid requirement.Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the other.T/FTrueUnder the "twelve 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.T/FTrue
If the one-year rule is not satisfied, the prepayment is prorated and deducted over the benefit period.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.False
The amount paid for the 18-month period is not all deductible in the current tax year because the prepayment period extends substantially beyond the end of the tax year following the year of payment (i.e., must be capitalized). However, that portion of the prepaid rent which relates to September through December of the current tax year may be deducted in the current tax year.The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.T/FtrueThe 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.False
A reserve for estimated expenses (e.g., bad debt) is not allowed to an accrual method taxpayer for tax purposes because the economic performance test cannot be satisfied. For a cash method taxpayer, there is no addition to the reserve for bad debts because income has not been recognized that would have generated a debt.All domestic bribes (i.e., to a U.S. official) are disallowed as deductions.True
However, a payment to a foreign official is deductible if it is not in violation of the Foreign Corrupt Practices Act of 1977.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.False
Fines and penalties paid for violations of laws are never deductible.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. T/fFalse
The payment to the U.S. official is not deductible. However, unless the payment is illegal under the Foreign Corrupt Practices Act of 1977, the payment to the Saudi official can be deducted.The cost of legal advice associated with the preparation of an individual's Federal income tax return that is paid in 2018 is not deductible because it is a personal expense.True
This deduction is disallowed beginning in 2018 under the TCJA of 2017. Miscellaneous itemized deductions subject to the 2% of AGI floor are no longer allowed as a deductionTwo-thirds of treble damage payments under the antitrust law are not deductible.True
Only one-third of such payments is deductible.Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.FalseIn this circumstance, the legal fees are deductible.If a taxpayer operates an illegal business, no deductions are permitted. T/FFalse
The usual expenses for operating an illegal business are deductible. But § 162 disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments. However, for illegal trafficking in drugs, § 280E disallows all deductions.Ordinary and necessary business expenses, other than the cost of goods sold, of an illegal drug trafficking business, do not reduce taxable income.(T/F)True
Cost of goods sold is part of the gross income calculation and is not considered to be an expense. Thus, the § 280E prohibition on deductions does not affect cost of goods sold.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 notFalse
Deductions are not permitted for political contributionsA 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.True
The $1 million limit on deducting compensation applies only to executive compensation of publicly traded companies.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.False
For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible regardless of whether or not it is acquired.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.True
Even if the business is acquired, some or all of the expenses must be capitalized and amortized over a minimum 180-month period. If the business is not acquired, no deduction results.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.False
The satisfaction of the presumption merely shifts the burden of proof to the IRS. The possibility still exists that the IRS can prove the activity is a hobby.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.False
Satisfying the presumption shifts the burden of proof from the taxpayer to the IRS. Failing the presumption merely means the burden of proof remains with the taxpayer.If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.trueA hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby related expenses.True
Income from a hobby activity is included in income. Beginning in 2018, the TCJA of 2017 disallows the deduction of miscellaneous itemized deductions subject to the 2%-of-AGI floor which includes hobby related expenses.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.False
Property taxes and home mortgage interest can be deducted if the taxpayer itemizes deductions, even if related to a hobby.If a publicly-traded corporation hires a new CEO in 2018 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000.False
Beginning in 2018, the excessive executive compensation limit applies to performance- based compensation plans. The corporation can deduct only $1,000,000 of the CEO's compensation.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.True
The amount received as rent for a personal residence does not need to be included in the taxpayer's gross income unless the number of rental days exceeds 14. Thus, only Martha need report her rental income.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.trueIf a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowedFalse,
The personal use portion still must be prorated.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.False
Only the expenses that normally are allowed as itemized deductions (e.g., mortgage interest and property taxes) can be deducted.The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.True
The gross income ceiling on deducting expenses for a vacation home does not apply to expenses that are otherwise deductible (e.g., property taxes and mortgage interest). The personal use portion of such expenses is deductible as 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.False
None of these expenses can be deducted since they relate to personal use.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.False
The home can have personal use of 20 days (200 days × 10%) in this case and be classified as primarily rental use. Therefore, in this case, the use of the home is classified as primarily rental use.If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.50.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.False
The adjusted basis for depreciation is $390,000, the lower of Beulah's adjusted basis of $450,000 or the fair market value of $390,000 on the date of the conversion. However, additional data are necessary to determine whether the vacation home gross income ceiling on deductions rule applies. If the qualified rental period exception applies, the gross income limit does not apply. If the qualified rental period exception does not apply, then the gross income limit does apply.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.False
A taxpayer cannot deduct another taxpayer's obligation. Thus, Ralph cannot deduct his daughter's property taxes.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.False
Both the cost of the land and the building must be capitalized. The $150,000 paid for the building can be depreciated over the MACRS statutory period.Purchased goodwill must be capitalized, but can be amortized over a 60-month period.False
Goodwill is a § 197 intangible. Although it must be capitalized, it can be amortized over a 15-year statutory period.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).False
Marge's recognized loss is $0; Jason's adjusted basis for the land is his cost of $20,000.For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party.False,
An aunt is not a related party for § 267 loss disallowance purposes.An advance payment received in June 2018 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.False
Using the deferral method for advanced payments, an accrual method taxpayer reports on its tax return for the year of receipt the same amount as reported on its financial statements with the balance reported on the subsequent year's tax return.Trade or business expenses of a self-employed taxpayer should be treated as:
a. Deductible for AGI on Schedule E.
b. A deduction from AGI.
c. Deductible for AGI on Schedule C.
d. An itemized deduction if not reimbursed. e. None of the above.cWhich 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.eAll of these expenses are classified as itemized deductions.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.A.
Choice c. and d. are deductions from AGI. Choice b. is not deductible.Which of the following is correct?
A personal casualty loss incurred from a Presidentially declared disaster is classified as a deduction from
AGI.
Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
An expense associated with rental property is classified as a deduction for AGI.
Only a. and b. are correct.
a., b., and c., are correct.a., b., and c., are correct.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.cWhich 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.bWhich of the following is not" a trade or business"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.Which of the following is a required test for the deduction of a business expense? a. Ordinary
b. Necessaryc. Reasonabled. All of the abovee. None of the abovedPaula is the sole shareholder of Violet, Inc. For 2018, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2018 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.e
$100,000 of salary is reclassified as a dividend. Thus, Violet's taxable income increases by $100,000 because dividends are not deductible. Paula's gross income remains the same. Her salary income decreases by $100,000, but her dividend income increases by $100,000.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?
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.dPayments 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.c
Both cash basis and accrual basis taxpayers are required to recover the cost of capital assets through amortization, depletion, or depreciation over the actual or statutory life of the asset.Which of the following legal expenses are deductible for AGI in 2018?a. Incurred in connection with a trade or business.b. Incurred in connection with rental or royalty property held for the production of income. c. Incurred for tax advice relative to the preparation of an individual's income tax return. d. Only a. and b. qualify.e. a., b., and c. qualify.d
Expenses paid in 2018 for tax advice relative to the preparation of an individual's income tax return are not deductible.74. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2018, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2018, Rex had the following expenses:
Operating expenses in conducting bingo games . $247,000
Payoff money to state and local police . $24,000
Newspaper ads supporting H.R. 9 . $3000
Political contributions to legislators who support H.R. 9 . 8000
Of these expenditures, Rex may deduct:
a. $247,000.b. $250,000.c. $258,000.d. $282,000.e. None of the abovea
Rex can deduct only the $247,000 of operating expensesAndrew, who operates a laundry business, incurred the following expenses during the year.
∙ Parking ticket of $250 for one of his delivery vans that parked illegally.
∙ Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
∙ DUI ticket of $500 while returning from the rock concert.
∙ Attorney's fee of $600 associated with the DUI ticket.
What amount can Andrew deduct for these expenses? a. $0.
b. $250.c. $600.d. $1,425.e. None of the above.a
None of these expenses are deductible. The $75 parking ticket, the $500 DUI ticket, and the $600 attorney fee are all personal expenses. The $250 parking ticket, although related to his laundry business, is not deductible because it is a violation of public policy.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?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.eTommy, 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 deductiblee
Since Tommy is not in a business that is the same as or similar to the one being investigated and did not acquire the new business, his investigation expenses cannot be deducted.Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2018, 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 2018.c. Expense $9,000 for 2018 and capitalize $14,000. d. Capitalize $23,000.e. None of the above.b
Since Iris owns and operates TV rental outlets, all of the investigation expenses can be deducted.83. 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.e
All of these items are relevant factors in determining whether an activity is profit- seeking or a hobby.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
a. (1), (2), (3).b. (1), (3), (2).
c. (2), (3), (1). d. (2), (1), (3). e. (3), (2), (1).c
Before 2018, the last two categories of deductions were deductible from AGIas miscellaneous itemized deductions (to the extent they exceeded 2 percent of AGI). From 2018 through 2025, miscellaneous itemized deductions are not deductible.Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During 2018 she sold the bedspreads for $10,000. She incurred expenses as follows:
Supplies $4000
Interest on loan to get business started . 500
Advertising . 6500
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 nothing.
e. None of the aboved
Beginning in 2018 expenses related to a hobby are not deductible87. Which of the following is not deductible in 2018?a. Moving expenses in excess of reimbursement.b. Tax return preparation fees of an individual.c. Expenses incurred associated with investments in stocks and bonds. d. Allowable hobby expenses in excess of hobby income.
e. All of the above.e
None of the expenses are deductible in 2018.If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is 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.a
Expenses that would otherwise be deductible (e.g., property taxes and interest on mortgage of personal residence) can be claimed (choice b.).Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions:
Salary from job $90,000
Alimony received from ex-wife 10,000
Medical expenses 8,000
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 these.eTrade 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 floor.
c. Deductible for AGI.
d. An itemized deduction if not reimbursed.
e. None of these.cAl is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:
Alimony $20,000
Charitable contributions 4,000
Contribution to a traditional IRA 5,500
Expenses paid on rental property 7,500
Interest on home mortgage and property taxes on personal residence 7,200
State income tax 2,200
What is Al's AGI?
a. $94,100.
b. $103,000.
c. $107,000.
d. $127,000.
e. None of these.cMarsha is single, had gross income of $50,000, and incurred the following expenses:
Charitable contribution $2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 3,000
Penalty on early withdrawal of savings 250
Her AGI is:
a. $39,750.
b. $49,750.
c. $40,000.
d. $39,750.
e. None of these.bWhich 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 these.eWhich of the following is a deduction for AGI (itemized deduction)?
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.aWhich of the following is correct?
a. A personal casualty loss is classified as a deduction from AGI.
b. Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
c. An expense associated with rental property is classified as a deduction for AGI.
d. Only a. and b. are correct.
e. a., b., and c., are correct.eWhich 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 these.cWhich 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 these are correct.bWhich 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 these are "trade or business" expenses.cWhich 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 thesedPaula is the sole shareholder of Violet, Inc. For 2014, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2014 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 these is correct.eDuring 2013, 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 2014. What is the amount of the deduction for salary expense?
a. If Silver uses the cash method, $175,000 in 2013 and $0 in 2014.
b. If Silver uses the cash method, $0 in 2013 and $195,000 in 2014.
c. If Silver uses the accrual method, $175,000 in 2013 and $20,000 in 2014.
d. If Silver uses the accrual method, $195,000 in 2013 and $0 in 2014.
e. None of these is correct.dBenita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct?
a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2015.
b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014.
c. If Benita uses the accrual method, she can choose to deduct the expense in either 2014 or 2015.
d. Only b. and c. are correct.
e. a., b., and c. are correct.bPayments 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 these.cPetal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2014, the following occur associated with bad debts.
Credit sales $400,000
Collections on credit sales 250,000
Amount added to the reserve 10,000
Beginning balance in the reserve -0-
Identifiable bad debts during 2014 12,000
The amount of the deduction for bad debt expense for Petal for 2014 is: a. $10,000.
b. $12,000.
c. $22,000.
d. $140,000.
e. None of these.bWhich of the following legal expenses are deductible for AGI?
a. Incurred in connection with a trade or business.
b. Incurred in connection with rental or royalty property held for the production of income.
c. Incurred for tax advice relative to the preparation of an individual's income tax return.
d. Only a. and b. qualify.
e. a., b., and c. qualify.dRex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2014, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2014, Rex had the following expenses:
Operating expenses in conducting bingo games $247,000
Payoff money to state and local police 24,000
Newspaper ads supporting H.R. 9 3,000
Political contributions to legislators who support H.R. 9 8,000
Of these expenditures, Rex may deduct:
a. $247,000.
b. $250,000.
c. $258,000.
d. $282,000.
e. None of these.aAndrew, who operates a laundry business, incurred the following expenses during the year.
• Parking ticket of $250 for one of his delivery vans that parked illegally.
• Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
• DUI ticket of $500 while returning from the rock concert.
• Attorney's fee of $600 associated with the DUI ticket.
What amount can Andrew deduct for these expenses?
a. $0.
b. $250.
c. $600.
d. $1,425.
e. None of these.aWhich 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 these.cTerry 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.
Terry Jim
Employee salaries $200,000 $200,000
Bribes to police 25,000 25,000
Rent and utilities 50,000 50,000
Cost of goods sold -0- 125,000
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 these.bTom operates an illegal drug-running operation and incurred the following expenses:
Salaries $ 75,000
Illegal kickbacks 20,000
Bribes to border guards 25,000
Cost of goods sold 160,000
Rent 8,000
Interest 10,000
Insurance on furniture and fixtures 6,000
Utilities and telephone 20,000
Which of the above amounts reduces his taxable income?
a. $0.
b. $160,000.
c. $279,000.
d. $324,000.
e. None of these.bFor a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation?
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.eTommy, 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.eIris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, 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 2014.
c. Expense $9,000 for 2014 and capitalize $14,000.
d. Capitalize $23,000.
e. None of these.bWhich 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. If the business is acquired, the 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 these.bWhich 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 these are relevant factors.eFor 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).cPriscella 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:
Supplies $4,000
Interest on loan to get business started 500
Advertising 6,500
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 these.eCory incurred and paid the following expenses:
Tax return preparation fee $ 600
Moving expenses 2,000
Investment expenses 500
Expenses associated with rental property 1,500
Interest expense associated with loan to finance tax-exempt bonds 400
Calculate the amount that Cory can deduct (before any percentage limitations). a. $5,000.
b. $4,600.
c. $3,000.
d. $1,500.
e. None of these.bWhich of the following is not deductible?
a. Moving expenses in excess of reimbursement.
b. Tax return preparation fees of an individual.
c. Expenses incurred associated with investments in stocks and bonds.
d. Allowable hobby expenses in excess of hobby income.
e. None of these.dIf a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is 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.aRobyn 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:
Mortgage interest $9,000
Real estate taxes 3,000
Utilities 2,000
Maintenance 1,000
Insurance 500
Depreciation (rental part) 4,000
Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:
a. $0.
b. $6,000.
c. $8,000.
d. $12,000.
e. None of these.dIf a vacation home is determined to be a personal/rental use residence, which of the following statements is correct?
a. All rental income is included in gross income.
b. All rental related expenses that are deductible are classified as deductions from AGI.
c. Expenses must be allocated between rental and personal use.
d. Only a. and c. are correct.
e. a., b., and c. are correct.dBob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows:
Gross rental income $ 4,000
Less: Mortgage interest and property taxes $3,500
Other allocated expenses 2,000 (5,500)
Net rental loss ($1,500)
What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable?
a. A $1,500 loss should be reported.
b. Only the mortgage interest and property taxes should be deducted.
c. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use.
d. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted.
e. Bob and April should include none of the income or expenses related to the beach house in their current year income tax return.aBecause Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct?
a. If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest part.
b. If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part.
c. If Jeanette pays the mortgage company directly, she cannot deduct the interest part.
d. Only b. and c. are correct.
e. a., b., and c. are correct.dMelba incurred the following expenses for her dependent daughter during the current year:
Payment of principal on daughter's automobile loan $3,600
Payment of interest on above loan 2,900
Payment of daughter's property taxes 1,800
Payment of principal on daughter's personal residence loan 2,800
Payment of interest on daughter's personal residence loan 7,000
How much may Melba deduct in computing her itemized deductions? a. $0.
b. $8,800.
c. $11,700.
d. $18,100.
e. None of these.aVelma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows:
General representation in obtaining the divorce $1,500
Services in obtaining custody of the child 900
Services in settlement of martial property 600
Determining the tax consequences of: Dependency deduction for child
700
Property settlement 1,300
Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is:
a. $0.
b. $700.
c. $2,000.
d. $5,000.
e. None of these.cWhich of the following must be capitalized by a business?
a. Replacement of a windshield of a business truck which was broken in an accident.
b. Repair of a roof of a building used in business.
c. Amount paid for a covenant not to compete.
d. Only b. and c. must be capitalized.
e. a., b., and c. can be expensed rather than capitalized.cOn January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.
Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014?
a. $10,667.
b. $16,000.
c. $20,000.
d. $32,667.
e. None of these.cIn January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?
a. Disallowed loss to James of $2,000; gain to Lance of $1,000.
b. Disallowed loss to Lance of $2,000; gain to James of $3,000.
c. Deductible loss to Lance of $2,000; gain to James of $3,000.
d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
e. None of these.dNikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct?
a. Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis).
b. Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).
c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.
d. Only a. and b. are correct.
e. a., b., and c. are correct.cWhich of the following is not a related party for constructive ownership purposes under § 267?
a. The taxpayer's aunt.
b. The taxpayer's brother.
c. The taxpayer's grandmother.
d. A corporation owned more than 50% by the taxpayer.
e. None of these.aPeggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year?
a. $5,000 for the current year.
b. $5,000 for the prior year and $5,000 for the current year.
c. $5,000 for the prior year.
d. $10,000 for the current year.
e. None of the above.eJed is an electrician. Jed and his wife are accrual basis taxpayers and file a joint return. Jed wired a new house for Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement. Jed was able to collect the judgement but not the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year?
a. $0
b. $2,000
c. $3,000
d. $5,000
e. None of the abovecOn June 2, 2015, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses the accrual method. In 2016, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to receive any of the amount owed to him. In 2017, final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2017?
a. $0
b. $7,000
c. $8,000
d. $12,000
e. None of the aboveaMary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection?
a. $0 income
b. $8,000 income
c. $11,000 income
d. $12,000 income
e. None of the abovebLast year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $97,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected.
a. $0
b. $2,000 gain
c. $3,000 loss
d. $13,000 loss
e. None of the aboveeTwo years ago, Gina loaned Tom $50,000. Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance. Last year, when the balance owing on the loan was $18,000, Tom defaulted on the note. As of the end of last year, there appeared to be no reasonable prospect of Gina recovering the $18,000. As a consequence, Gina claimed the $18,000 as a nonbusiness bad debt. Last year, Gina had AGI of a negative $6,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends. Gina did not itemize her deductions. During the current year, Tom paid Gina $13,000 in final settlement of the loan. How should Gina account for the payment in the current year?
a. File an amended tax return for last year.
b. Report no income for the current year.
c. Report $8,000 of income for the current year.
d. Report $12,000 of income for the current year.
e. None of the above.ANSWER: e
RATIONALE: Income should be reported based on the tax benefit rule. The tax benefit was $5,000.Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:
a. No deduction.
b. $3,000 deduction.
c. $20,000 deduction.
d. $21,800 deduction.
e. None of the above.ANSWER: b
RATIONALE: This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $21,800 ($20,000 + $1,800; a deduction is allowed for the $1,800 of accrued interest receivable because Tom is an accrual basis taxpayer). The deduction for the current year is limited to $3,000, since the bad debt is classified as a short-term capital loss.Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank's Auto. As partial payment for the car, the dealer accepted the note from Sharon's sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharon's sister died. Hank's Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss, with respect to the note, that Hank's Auto may claim on the current year tax return?
a. $0
b. $3,000
c. $15,500
d. $18,000
e. None of the aboveANSWER: c
RATIONALE: This is a business bad debt for Hank's Auto and therefore, the loss is $15,500.On September 3, 2015, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2015, the stock was worth $85,000. On August 15, 2016, Able was notified that the stock was worthless. How should Able report this item on his 2016 tax return?
a. $85,000 capital loss.
b. $85,000 ordinary loss.
c. $50,000 ordinary loss and $35,000 capital loss.
d. $60,000 ordinary loss.
e. None of the above.ANSWER: e
RATIONALE: The loss of $60,000 is classified as a $60,000 capital loss because the stock is not § 1244 stock to Able.On February 20, 2015, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2016, the stock became worthless. During 2016, Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should Bill treat these items on his 2016 tax return?
a. $4,000 long-term capital loss and $9,000 short-term capital loss.
b. $4,000 long-term capital loss and $3,000 short-term capital loss.
c. $8,000 ordinary loss and $3,000 short-term capital loss.
d. $8,000 ordinary loss and $5,000 short-term capital loss.
e. $8,000 long-term capital loss and $6,000 short-term capital loss.ANSWER: c
RATIONALE: Ordinary loss (small business stock) ($8,000)
Long-term capital gain $5,000
Less long-term capital loss (worthless securities) (1,000)
Net long-term capital gain $4,000
Less short-term capital loss (nonbusiness bad debt) (9,000)
Net short-term capital loss ($5,000)
Short-term capital loss limited to ($3,000)
CMPV.SWFT.LO: 7-02 - LO: 7-02John files a return as a single taxpayer. In 2016, he had the following items:
∙ Salary of $40,000.
∙ Loss of $65,000 on the sale of § 1244 stock acquired two years ago.
∙ Interest income of $6,000.
Determine John's AGI for 2016.
a. ($5,000).
b. $0.
c. $45,000.
d. $51,000.
e. None of the above.ANSWER: b
RATIONALE: Salary $40,000
Interest income 6,000
Ordinary loss (§ 1244 ordinary loss) (50,000)
AGI $ -0-
$15,000 ($65,000 - $50,000) is long-term capital loss. Of this amount, no loss can be used because there is no ordinary income. $15,000 will be carried forward.Bruce, who is single, had the following items for the current year:
∙ Salary of $80,000.
∙ Gain of $20,000 on the sale of § 1244 stock acquired two years earlier.
∙ Loss of $75,000 on the sale of § 1244 stock acquired three years earlier.
∙
Worthless stock of $15,000. The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year.
Determine Bruce's AGI for the current year.
a. $27,000
b. $38,000
c. $42,000
d. $47,000
e. None of the aboveANSWER: a
RATIONALE: Salary $80,000
§ 1244 ordinary loss (50,000)
Long-term capital gain $20,000
Long-term capital loss
Excess § 1244 loss ($75,000 - $50,000) $25,000
Worthless security 15,000 (40,000)
Net long-term capital loss (limited to $3,000) (3,000)
Adjusted gross income $27,000On July 20, 2015, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000. On November 10, 2015, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2016, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2016 return?
a. $54,000 ordinary loss.
b. $100,000 ordinary loss; $46,000 net capital gain.
c. $100,000 ordinary loss; $20,000 STCL.
d. $130,000 ordinary loss; $66,000 LTCG.
e. None of the above.ANSWER: e
RATIONALE: Amount realized (1,000 shares × $30 per share) $ 30,000
Less: basis (150,000)
Recognized loss ($120,000)
STCL ($120,000)
The stock is not § 1244 stock because it was not purchased from the corporation.
Amount realized (3,000 shares × $30 per share) $ 90,000
Less: basis (24,000)
Recognized gain (LTCG) $ 66,000
Hence, Matt has a $54,000 STCL ($120,000 - $66,000).Which of the following events would produce a deductible loss?
a. Erosion of personal use land due to rain or wind.
b. Termite infestation of a personal residence over a several year period.
c. Damages to personal automobile resulting from a taxpayer's willful negligence.
d. A misplaced diamond ring.
e. None of the above.ANSWER: e
RATIONALE: A "theft" does not include misplaced or lost items.In 2016, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $42,000 AGI for the year before considering the casualty.
Fair Market Value
Asset Adjusted Basis Before After Insurance Recovery
A $9,200 $8,000 $1,000 $2,000
B 3,000 4,000 -0- 4,000
C 3,700 1,700 -0- 900
Wally's casualty loss deduction is:
a. $1,500.
b. $1,600.
c. $4,800.
d. $58,000.
e. None of the above.ANSWER: e
RATIONALE: Asset A $5,000 loss
Asset B $1,000 gain
Asset C 800 loss
Total $5,800 loss $1,000 gain
AGI before casualty $42,000
Ordinary gain 1,000
Ordinary loss (1,000)
AGI after casualty $42,000
Casualty loss ($5,800 - $1,000) $4,800
Less: Statutory floor (100)
Less: AGI limitation (10% × $42,000) (4,200)
Casualty loss deduction $ 500Jim had a car accident in 2016 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use. Jim received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim's AGI for the year is $60,000, determine his deductible loss on the car.
a. $900
b. $2,900
c. $3,000
d. $9,000
e. None of the aboveANSWER: e
RATIONALE: The car is used for business use and hence, the amount of the loss is $40,000 (adjusted basis) reduced by the insurance recovery ($21,000). The $19,000 loss is not subject to the $100 floor per event and the 10%-of-AGI limitation. So the loss is $19,000.Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2016. The car's adjusted basis at the time of the accident was $13,000. Its fair market value was $10,000. The car was covered by a $2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss). What is Norm's deductible loss?
a. $0
b. $100
c. $500
d. $9,500
e. None of the aboveANSWER: c
RATIONALE: Amount (lesser of adjusted basis or FMV decline) $10,000
Less: Insurance recovery as if the claim had been filed (8,000)
Statutory floor (100)
AGI limitation (10% × $14,000) (1,400)
Deductible loss $ 500
The loss is permitted for the uninsured portion of the casualty.In 2016, Grant's personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows:
Cost basis $280,000
Value before casualty 250,000
Value after casualty -0-
What is Grant's allowable casualty loss deduction?
a. $0
b. $6,500
c. $6,900
d. $10,000
e. $80,000ANSWER: a
RATIONALE: The proceeds received are $250,000. Therefore, Grant has no casualty gain or a casualty loss.John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:
Cost basis $260,000
Value before the fire 400,000
Value after the fire 100,000
Insurance recovery 270,000
John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:
Cost basis $80,000
Value before the accident 56,000
Value after the accident 20,000
Insurance recovery 18,000
What is John's itemized casualty loss deduction?
a. $0
b. $2,000
c. $17,000
d. $18,000
e. None of the aboveANSWER: a
RATIONALE: Gain on home ($260,000 - $250,000) = $10,000.
John has no itemized casualty loss deduction because casualty gains exceed casualty losses. There is no casualty loss on the car because the accident was the result of willful negligence.In 2016, Mary had the following items:
Salary $30,000
Personal use casualty gain 10,000
Personal use casualty loss (after $100 floor) 17,000
Other itemized deductions 4,000
Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2016.
a. $12,600
b. $12,900
c. $13,900
d. $21,900
e. None of the aboveANSWER: a
RATIONALE: Salary $30,000
Personal use casualty gains in excess of personal use casualty losses ($10,000 - $10,000) -0-
Adjusted gross income $30,000
Less: Deductions
Itemized deductions
Casualty loss ($17,000 - $10,000) $7,000
AGI floor (10% × $30,000) (3,000)
Deductible casualty loss $4,000
Other itemized deductions 4,000
Total itemized deductions $8,000
Standard deduction (larger than itemized deductions) (9,300)
Personal exemption ($4,050 × 2) (8,100)
Taxable income $12,600In 2016, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:
Loss from damage to rental property ($6,000)
Loss from theft of bonds (3,000)
Personal casualty gain 4,000
Personal casualty loss (after $100 floor) (9,000)
Determine the amount of Morley's itemized deduction from the losses.
a. $0
b. $2,900
c. $5,120
d. $5,600
e. None of the aboveANSWER: d
RATIONALE: AGI before casualties $30,000
Rental property loss (6,000)
Personal casualty gain $4,000
Personal casualty loss (4,000) -0-
Adjusted gross income $24,000
Itemized deductions
Casualty loss [($9,000 - $4,000) - (10% × $24,000)] $2,600
Miscellaneous itemized deductions 3,000
Total itemized deductions $ 5,600
The bonds are property held for the production of income, but not attributable to rents or royalties. Therefore, the loss is a miscellaneous itemized deduction not subject to the 2%-of-AGI floor.In 2016, Theo, an employee, had a salary of $30,000 and experienced the following losses:
Loss from damage to rental property ($10,000)
Unreimbursed loss from theft of business computer (5,000)
Personal casualty gain 4,000
Personal casualty loss (after $100 floor) (9,000)
Determine the amount of Theo's itemized deduction from these losses.
a. $0
b. $2,800
c. $2,900
d. $4,580
e. None of the aboveANSWER: e
RATIONALE: Salary $30,000
Rental loss (10,000)
Personal casualty gain $4,000
Personal casualty loss (4,000) -0-
AGI $20,000
The loss on the theft of the business computer is a miscellaneous itemized deduction which is subject to the 2%-of-AGI floor.
Loss on theft [$5,000 - (2% × $20,000)] $4,600
Casualty loss in excess of casualty gain ($9,000 - $4,000) $5,000
Less: 10% × $20,000 (AGI) (2,000) 3,000
Total itemized deduction $ 7,600Alicia was involved in an automobile accident in 2016. Her car was used 60% for business and 40% for personal use. The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If Alicia's AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss.
a. $4,500
b. $6,100
c. $8,000
d. $24,000
e. None of the aboveANSWER: a
RATIONALE: Business Use Personal Use
Cost $24,000 $16,000
Less: depreciation (8,000) -0-
Basis $16,000 $16,000
Fair market value $12,000 $ 8,000
Loss $16,000 $ 8,000
AGI before casualty loss $50,000
Less: Business loss (16,000)
AGI $34,000
Personal casualty loss $ 8,000
Less: $100 floor (100)
10% of AGI (10% × $34,000) (3,400)
Itemized deduction $ 4,500In 2015, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of 2016, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during 2016.
a. None of the $5,000 should be included in gross income.
b. $2,900 should be included in gross income.
c. $5,000 should be included in gross income.
d. Last year's return should be amended to include the $5,000.
e. None of the above.ANSWER: a
RATIONALE: Sarah would have taken a casualty loss of $2,900 ($6,000 - $100 - $3,000) in 2015. Therefore, the total itemized deductions would be $4,900 ($2,900 + $2,000). Because this is less than the 2015 standard deduction of $6,300 for single taxpayers, Sarah would have taken the standard deduction. Hence, none of the $5,000 would be included in gross income under the tax benefit rule.Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year.
a. $3,750
b. $14,650
c. $14,750
d. $18,750
e. None of the aboveANSWER: d
RATIONALE: Amount of loss (adjusted basis for business property that is completely destroyed) $90,000
Less: Insurance proceeds received ($75,000 × 95%) (71,250)
Business loss $18,750
A business casualty loss is classified as an ordinary loss.In the current year, Juan's home was burglarized. Juan had the following items stolen:
∙ Securities worth $25,000. Juan purchased the securities four years ago for $20,000.
∙
New tools which Juan had purchased two weeks earlier for $8,000. Juan uses the tools in making repairs at an apartment house that he owns and manages.
∙
An antique worth $15,000. Juan inherited the antique (a family keepsake) when the property was worth $11,000.
Juan's homeowner's policy had a $50,000 deductible clause for thefts. If Juan's salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.
a. $3,100
b. $6,000
c. $26,100
d. $26,500
e. None of the aboveANSWER: e
RATIONALE: Salary $50,000
Less: Loss on theft of tools (8,000)
AGI $42,000
Personal use property theft loss $11,000
Less: $100 floor (100)
10% of AGI (10% × $42,000) (4,200)
Deductible loss $ 6,700
Loss on securities 20,000
Total itemized deductions $26,700Regarding research and experimental expenditures, which of the following are not qualified expenditures?
a. Costs of ordinary testing of materials.
b. Costs to develop a plant process.
c. Costs of developing a formula.
d. Depreciation on a building used for research.
e. All of the above are qualified expenditures.ANSWER: aBlue Corporation incurred the following expenses in connection with the development of a new product:
Salaries $100,000
Utilities 18,000
Materials 25,000
Advertising 5,000
Market survey 3,000
Depreciation on machine 9,000
Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year.
a. $0
b. $118,000
c. $143,000
d. $152,000
e. $160,000ANSWER: a
RATIONALE: The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 + $9,000). Under the election to amortize, the monthly amortization is $2,533 ($152,000 ÷ 60 months). However, since sales will not start until next year, there is no deduction for the current year.Last year, Green Corporation incurred the following expenditures in the development of a new plant process:
Salaries $250,000
Materials 90,000
Utilities 20,000
Quality control testing costs 40,000
Management study costs 5,000
Depreciation of equipment 18,000
During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.
a. $48,000
b. $50,400
c. $54,667
d. $57,067
e. None of the aboveANSWER: b
RATIONALE: Salary $250,000
Materials 90,000
Utilities 20,000
Depreciation 18,000
Research and experimental costs $378,000
Current deduction $50,400 [($378,000 ÷ 60) × 8 months] Neither the quality control testing costs nor the management study costs are research and experimental expenditures.Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in the current year. Ivory's domestic production activities deduction is:
a. $36,000.
b. $42,000.
c. $54,000.
d. $63,000.
e. None of the above.ANSWER: c
RATIONALE: DPAD is calculated for Ivory as the lesser of the following:
∙ $700,000 × 9% = $63,000
∙ $600,000 × 9% = $54,000
So the DPAD is $54,000.In the current year, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber's DPAD for the current year is:
a. $54,000.
b. $57,600.
c. $58,000.
d. $79,200.
e. None of the above.ANSWER: a
RATIONALE: Amber's DPAD is limited to 9% of alternative minimum taxable income of $600,000.
$600,000 × 9% = $54,000.Cream, Inc.'s taxable income for the current year before any deduction for an NOL carryforward of $30,000 is $70,000. Cream's qualified production activities income (QPAI) is $60,000. What is the amount of Cream's domestic production activities deduction (DPAD) for the current year?
a. $1,200
b. $1,800
c. $2,400
d. $3,600
e. None of the aboveANSWER: d
RATIONALE: Taxable income for purposes of calculating the DPAD is reduced by any NOL carryforward. Thus, the amount of the DPAD is $3,600 [($70,000 - $30,000) × 9%].In preparing his 2010 Federal income tax return, Sam, who is not married, incorrectly claimed alimony
payments of $12,000 as an itemized deduction (rather than as a deduction for AGI). Sam's AGI is
$60,000 and itemized deductions (which consist of the alimony, property taxes, and mortgage interest)
are $20,000. Which of the following statements is correct?
A. The error will result in taxable income being overstated.
B. The error will result in taxable income being understated.
C. The error could result in either taxable income being overstated or understated.
D. The error will have no effect on taxable income.
E. None of the above.D. The error will have no effect on taxable income.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 floor.
C. Deductible for AGI.
D. An itemized deduction if not reimbursed.
E. None of the above.C. Deductible for AGI.Saul is single, under age 65, and has gross income of $50,000. His deductible expenses are as
follows:
Alimony $12,000
Charitable contributions 2,000
Contribution to a traditional IRA 5,000
Expenses paid on rental property 6,000
Interest on home mortgage and property taxes on personal residence 7,000
State income tax 2,200
What is Saul's AGI?
A. $15,800.
B. $27,000.
C. $32,000.
D. $33,000.
E. None of the above.B. $27,000.Janice is single, had gross income of $38,000, and incurred the following expenses:
Charitable contribution $2,500
Taxes and interest on home 9,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 4,000
Penalty on early withdrawal of savings 200
Her AGI is:
A. $21,300.
B. $28,800.
C. $32,800.
D. $35,500.
E. $37,800.E. $37,800.Which of the following expenses is classified as a deduction for AGI?
A. Alimony.
B. Reimbursed employee business expense.
C. Safe deposit box rental fee in which investment securities are stored.
D. Only a. and b.
E. a., b., and c.D. Only a. and b.Which of the following is a deduction from AGI (itemized deduction)?
A. Contribution to a traditional IRA.
B. Roof repairs to a rental home.
C. Safe deposit box rental fee in which stock certificates are stored.
D. Alimony payment.
E. None of the above.C. Safe deposit box rental fee in which stock certificates are stored.Which of the following is correct?
A. A personal casualty loss is classified as a deduction from AGI.
B. Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
C. An expense associated with rental property is classified as a deduction from AGI.
D. Only a. and b. are correct.
E. a., b., and c., are correct.D. Only a. and b. are correct.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.C. Mortgage interest on a building used in a business.Which of the following is incorrect?
A. Alimony is a deduction for AGI.
B. The expenses associated with royalty property are a deduction for AGI.
C. Contributions to a traditional IRA are a deduction from AGI.
D. Medical expenses are a deduction from AGI
E. All of the above are correct.B. The expenses associated with royalty property are a deduction for AGI.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.C. Parking ticket paid on business auto.Which of the following cannot be deducted as a § 162 business expense?
A. Expenses of investing in stocks and bonds.
B. Charitable contributions made by a sole proprietorship.
C. Fines and penalties.
D. Only a. and c. cannot.
E. a., b., and c. cannot.E. a., b., and c. cannot.Agnes is the sole shareholder of Violet, Inc. For 2010, she receives from Violet a salary of $200,000
and dividends of $100,000. Violet's taxable income for 2010 is $500,000. On audit, the IRS treats
$50,000 of Agnes's salary as unreasonable. Which of the following statements is correct?
A. Agnes's gross income will increase by $50,000 as a result of the IRS adjustment.
B. Violet's taxable income will not be affected by the IRS adjustment.
C. Agnes's gross income will decrease by $50,000 as a result of the IRS adjustment.
D. Violet's taxable income will increase by $50,000 as a result of the IRS adjustment.
E. None of the above is correct.D. Violet's taxable income will increase by $50,000 as a result of the IRS adjustment.Which of the following is incorrect?
A. All salaries of a business are deductible.
B. To be deductible, a business expense must be both ordinary and necessary.
C. The income and expenses of a business are reported on Schedule C.
D. The purchase of a building must be capitalized.
E. All of the above are incorrect.A. All salaries of a business are deductible.Benita incurred a business expense on December 10, 2010, which she charged on her bank credit
card. She paid the credit card statement which included the charge on January 5, 2011. Which of the
following is correct?
A. If Benita is a cash method taxpayer, she cannot deduct the expense until 2011.
B. If Benita is an accrual method taxpayer, she can deduct the expense in 2010.
C. If Benita uses the accrual method, she can choose to deduct the expense in either 2010 or 2011.
D. Only b. and c. are correct.
E. a., b., and c. are correct.B. If Benita is an accrual method taxpayer, she can deduct the expense in 2010.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.C. Must be deducted over the actual or statutory life of the asset.Swan, Inc. is an accrual basis taxpayer. Swan uses the aging approach to calculate the reserve for bad
debts. During 2010, the following occur associated with bad debts.
Credit sales $300,000
Collections on credit sales 280,000
Amount added to the reserve 12,000
Beginning balance in the reserve -0-
Identifiable bad debts during 2010 10,000
The amount of the deduction for bad debt expense for
Swan for 2010 is:
A. $10,000.
B. $12,000.
C. $20,000.
D. $22,000.
E. None of the above.A. $10,000.Which of the following is deductible as a trade or business expense?
A. A city coroner contributes to the mayor's reelection campaign fund.
B. Illegal bribes and kickbacks.
C. Two-thirds of treble damage payments.
D. Fines and penalties.
E. None of the above.E. None of the above.Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law.
During 2010, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would
legitimize bingo games. In 2010, Rex had the following expenses:
Operating expenses in conducting bingo games $247,000
Payoff money to state and local police 24,000
Newspaper ads supporting H.R. 9 3,000
Political contributions to legislators who support H.R. 9 8,000
Of these expenditures, Rex may deduct:
A. $247,000.
B. $250,000.
C. $258,000.
D. $282,000.
E. None of the aboveA. $247,000.Angela, a real estate broker, had the following income and expenses in her business:
Commissions income $100,000
Expenses:
Commissions paid to non-brokers for referrals
(illegal under state law and subject to criminal penalties) 20,000
Commissions paid to other real estate brokers for referrals
(not illegal under state law) 10,000
Travel and transportation 12,000
Supplies 4,000
Office and phone 5,000
Parking tickets 500
How much net income must Angela report from this business?
A. $48,500.
B. $49,000.
C. $60,000.
D. $68,500.
E. $69,000.E. $69,000.Melvin is engaged in an illegal drug-running operation. Which of the following expenses will reduce
Melvin's taxable income?
A. Rent.
B. Bribes paid to border guards.
C. Cost of goods sold.
D. Interest on business indebtedness.
E. None of the expenses are deductible.C. Cost of goods sold.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.
Terry Jim
Employee salaries $200,000 $200,000
Bribes to police 25,000 25,000
Rent and utilities 50,000 50,000
Cost of goods sold -0- 125,000
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.B. Terry should report profit from his business of $250,000.Tom operates an illegal drug-running operation and incurred the following expenses:
Salaries $ 75,000
Illegal kickbacks 20,000
Bribes to border guards 25,000
Cost of goods sold 160,000
Rent 8,000
Interest 10,000
Insurance on furniture and fixtures 6,000
Utilities and telephone 20,000
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.B. $160,000.Vera is the CEO of Brunettes, a publicly held corporation. For the year, she receives a salary of
$950,000, a bonus of $600,000, and contributions to her retirement plan of $35,000. The bonus was
awarded at the December board meeting based on Vera's threat to accept a better paying job with a
competitor. What amount may Brunettes deduct?
A. $950,000.
B. $985,000.
C. $1,550,000.
D. $1,585,000.
E. None of the above.E. None of the above.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.E. Not deductible.Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and
wants to expand to other states. During 2010, 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 2010.
C. Expense $9,000 for 2010 and capitalize $14,000.
D. Capitalize $23,000.
E. None of the above.B. Expense $23,000 for 2010.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. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business.
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.B. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business.Which of the following is not relevant in deciding whether an activity is profit-seeking or a hobby?
A. The time and effort expended.
B. The expertise of the taxpayers or their advisers.
C. The history of income or losses from the activity.
D. The tax benefits of the activity to the taxpayer.
E. All of the above factors are to be considered.E. All of the above factors are to be considered.For an activity classified as a hobby, the expenses are categorized as follows:
(1) Amounts deductible under other Code sections without regard to the nature of the activity,
such as property taxes and home mortgage interest.
(2) 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).
(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).B. (1), (3), (2).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:
Supplies $4,000
Interest on loan to get business started 500
Advertising 6,500
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 $10,000 of the expenses as itemized deductions.
D. Include $10,000 in income and deduct interest of $500 for AGI.
E. None of the above.C. Include $10,000 in income, deduct nothing for AGI, and claim $10,000 of the expenses as
itemized deductions.Cory incurred and paid the following expenses:
Tax return preparation fee $ 600
Moving expenses 2,000
Investment expenses 500
Expenses associated with rental property 1,500
Interest expense associated with loan to finance tax-exempt bonds 400
Calculate the amount that Cory can deduct (before any percentage limitations).
A. $5,000.
B. $4,600.
C. $3,000.
D. $1,500.
E. None of the aboveB. $4,600.
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