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Exam 6: Deductions and Losses: in General

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Question 1

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Assuming an activity is deemed to be a hobby, discuss the order and limits in which expenses must be deducted.

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Amounts deductible under other Code sect...

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Question 2

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

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While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees, marketing survey, etc.) in exploring its business potential. Her parents have agreed to lend her the money required to start the business. What amount of these investigation costs can Angel deduct if: a. She opens the bookstore on August 1, 2019. b. She decides not to open the bookstore.

Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?

Agnes operates a Christmas shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if: a. She opens a new shop in Vero Beach. b. She decides not to open a new shop in Vero Beach.

Arnold and Beth file a joint return in 2019. Use the following data to calculate their deduction for AGI. $\begin{array}{lr}\text { Mortgage interest on personal residence } & \$ 6,000 \\\text { Property taxes on personal residence } & 2,500 \\\text { Alimony payments (divorce finalized in 2014) } & 12,000 \\\text { Moving expenses } & 7,000 \\\text { Charitable contributions } & 1,500 \\\text { State income taxes } & 5,000 \\\text { Investment interest }(\$ 8,000 \text { of expenses limited to net investment income of } \$ 7,500) & 7,500 \\\text { Unreimbursed employee expenses } & 2,500 \\\text { Sales taxes } & 2,600\end{array}$

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

What are the relevant factors to be considered in determining whether an activity is profit-seeking or a hobby?

Which of the following may be deductible in 2019?

Which of the following is not deductible in 2018?

Paula is the sole shareholder of Violet, Inc. For 2019, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2019 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct?

Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0. Based on this policy, Robin and Jeff each receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.

Are there any circumstances under which lobbying expenditures are deductible?

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

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

If part of a shareholder/employee's salary is classified as unreasonable, determine the effect on the: a. Shareholder/employee's gross income. b. Corporation's taxable income.

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.

If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses are disallowed?

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.

Marvin spends the following amounts on a house he owns: $\begin{array} { l r } \text { Repair to roof } & \$ 1,100 \\\text { Carpeting for the living room } & 1,200 \\\text { Painting of the exterior } & 4,000 \\\text { Replacement of front door } & 800\end{array}$ a. How much of these expenses can Marvin deduct if the house is his principal residence? b. How much of these expenses can Marvin deduct if he rents the house to a tenant? c. Classify any deductible expenses as deductions for AGI or as deductions from AGI.