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Exam 6: Deductions and Losses: in General

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Question 1

True/False

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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.

A) True
B) False

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Question 2

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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 regardless of whether the business being investigated is acquired.
C) That business must be related to the taxpayer's present business for any expense ever to be deductible.
D) Regardless of whether the taxpayer is already engaged in the trade or business,the expenses must be capitalized and amortized.
E) None of the above.

F) A) and B)
G) None of the above

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Question 3

Multiple Choice

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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) .

How can an individual's consultation with a lawyer be classified as a deduction for AGI in some cases and a deduction from AGI in other instances?

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

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

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

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.

Bruce owns several sole proprietorships.Must Bruce use the same accounting method for each of these businesses?

Robyn 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:

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

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

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).

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

During the year,Rita rented her vacation home for twelve days for $2,400 and she used it personally for three months.The following expenses were incurred on the home: Property taxes $ 2,200 Mortgage interest 10,800 Utilities and maintenance 1,900 Depreciation 5,000 Insurance 900 ​ Calculate her rental gain or loss and itemized deductions.

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

Under what circumstance can a bribe be deducted?

In applying the $1 million limit on deducting executive compensation,what corporations are subject to the deduction limit? What executives are covered?

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2015,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: