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Exam 5: Business Deductions

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Question 41

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

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

F) C) and E)
G) A) and B)

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Question 42

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Under 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.

A) True
B) False

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Question 43

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

In 2018, Marci is considering starting a new business.Marci incurs the following costs associated with this venture. Marci started the new business on January 5, 2019.Determine the deduction for Marci's startup costs for 2018.

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

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

Can a trade or business expense be deductible if it is necessary but not ordinary?

Regarding research and experimental expenditures, which of the following are not qualified expenditures?

Which of the following is not a characteristic of MACRS for property other than real estate?

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

Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.

Discuss the difference between the half-year convention and the mid-quarter convention.

Nancy is a 40% shareholder and president of Robin Corporation, a calendar year C corporation.The board of directors of Robin has decided to pay Nancy a $75,000 bonus for the current year based on her outstanding performance.The directors want to pay the $75,000 as salary, but Nancy would prefer to have it paid as a dividend.If Nancy is in the 37% marginal tax bracket irrespective of the treatment of the bonus, discuss which form of payment would be most beneficial for each party.Ignore any employment tax considerations.)

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

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

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

Discuss the tax implications of a seller allocating the selling price to goodwill or a covenant not to compete.

Hans purchased a new passenger automobile on August 17, 2018, for $30,000.During the year the car was used 40% for business and 60% for personal use.Determine his cost recovery deduction for the car for 2018.

On January 2, 2018, 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 2018?

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