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Exam 6: Deductions and Losses: in General

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Question 51

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

A) True
B) False

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Question 52

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The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

A) True
B) False

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Question 53

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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.

Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother,Shirley,for $160,000.Walter reinvests the proceeds in the stock market.Shirley holds the land for one year and a day and sells it in the marketplace for $169,000. a.​Determine the tax consequences to Walter. b.Determine the tax consequences to Shirley.

Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

Are all personal expenses disallowed as deductions?

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2017,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:

Hobby activity expenses are deductible from AGI to the extent of hobby income.Such expenses not in excess of hobby income are not subject to the 2%-of-AGI floor.

In a related party transaction where realized loss is disallowed,when can the disallowed loss be used by the buyer on the subsequent sale of the property? In the case of a related party disallowed loss transaction,can the related party seller's disallowed loss be used by a taxpayer other than the related party buyer?

Bobby operates a drug trafficking business.Because he has an accounting background,he keeps detailed financial records.What expenses can Bobby deduct on his Federal income tax return?

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.

Olive,Inc.,an accrual method taxpayer,is a corporation that is equally owned by Maurice and Alex,who are brothers.The corporation uses the accrual method of accounting and the shareholders use the cash method.To provide Olive with funds to acquire additional working capital,the shareholders each loan Olive $100,000 with a 6% interest rate.At the end of the tax year,there is unpaid accrued interest of $3,000 due to each shareholder.From a timing perspective,when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

If a taxpayer operates an illegal business,no deductions are permitted.

Bob 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: ​ 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?

Sandra owns an insurance agency.The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. Calculate Sandra's net profit using the cash method for 2017.

Austin,a single individual with a salary of $100,000,incurred and paid the following expenses during the year: ​ Calculate Austin's deductions for AGI.

Sammy,a calendar year cash basis taxpayer who is age 66,has the following transactions in 2017: ​ Based on this information,Sammy has:

The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business).

In 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?