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To be tax deductible, an expense must be all of the following except A) ordinary and necessary. B) paid in cash. C) reasonable in amount. D) an expense of the taxpayer.
B) paid in cash.
Generally, deductions for adjusted gross income on an individual's tax return include all the following types of expenses except those A) incurred in gambling activities. B) incurred in a trade or business. C) incurred in the production of rent income. D) incurred in the production of royalty income
A) incurred in gambling activities.
Sheila sells stock, which has a basis of $12,000, to her daughter for $7,000, the stock's fair market value. Subsequently, the daughter sells the stock to an unrelated party for $5,000. Which of the following is true for the Sheila and the Daughter? A) Sheila Daughter recognizes no loss recognizes loss of $2,000 B) Sheila Daughter recognizes no loss recognizes loss of $5,000 C) Sheila Daughter recognizes loss of $3,000 recognizes loss of $5,000 D) Sheila Daughter recognizes loss of $3,000 recognizes loss of $2,000
A) Sheila Daughter recognizes no loss recognizes loss of $2,000 The $5,000 ($7,000 - $12,000) loss on Sheila's sale to Daughter is disallowed under the related party transaction rules. Her daughter's subsequent sale at a $2,000 loss, however, is recognized.
American Healthcare (AH), an insurance company, is trying to persuade Congress to enact nationwide anti-smoking legislation. As part of this effort, AH paid $500,000 to hire a lobbying firm to discuss its concerns with members of Congress. AH also contributed $100,000 to candidates for political office who support limiting public smoking. What amount of these expenditures can AH deduct? A) $0 B) $100,000 C) $500,000 D) $600,000
A) $0 Lobbying expenses are only deductible if incurred for local issues; political contributions are not deductible.
Pat, an insurance executive, contributed $1,000,000 to the re-election campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct? A) $0 B) $100,000 C) $500,000 D) $1,000,000
A) $0 No deduction is allowed for a political contribution.
Donald sells stock with an adjusted basis of $38,000 to his son, Kiefer, for its fair market value of $30,000. Kiefer sells the stock three years later for $32,000. Kiefer will recognize a gain on the subsequent sale of A) $0. B) $2,000. C) ($6,000). D) ($8,000).
A) $0. Selling Price $32,000 Minus: Cost (30,000) Gain $2,000 Minus: Previously disallowed loss ($30,000 - $38,000) ( 2,000) Taxable gain $ 0
Jones, Inc., a calendar-year taxpayer, is in the air conditioner repair business. The business uses the cash method. In December of the current year, Jones charged $100 of supplies at Refrigeration, Inc., (he will pay the credit card bill in January) and also purchased $600 of supplies at XYZ on open account (he will make a payment on the open account in January). What is the amount that is deductible by Jones, Inc., in the current year? A) $100 B) $600 C) $700 D) The amounts must be capitalized and charged to expense as used.
A) $100 Credit card charges are deductible in the year the charge is made regardless of the year in which the payment is made, but open account charges are not deducted until paid.
Jimmy owns a trucking business. During the current year he incurred the following: Gasoline and Oil $ 100,000 Maintenance $ 15,000 Fines for Speeding and Illegal parking $ 8,000 Bribes to Government Inspection Officials $ 21,000 What is the total amount of deductible expenses? A) $115,000 B) $123,000 C) $108,000 D) $144,000
A) $115,000 Bribes and fines are not deductible. $100,000 + $15,000 = $115,000.
On December 1, Robert, a cash method taxpayer, borrows $10,000 from the bank for use in his business. Under the terms of the loan, the bank discounts the loan by $300, paying Robert the $9,700 cash proceeds. If Robert repays the loan next year, he may deduct A) $300 next year. B) $300 this year. C) $25 this year and $275 next year. D) nothing since the note is "noninterest-bearing."
A) $300 next year. A cash basis taxpayer gets the deduction in the year in which interest is paid.
During the current year, the United States files criminal and civil actions against Joe, the CEO of Box Corporation, and Jane, the president of Cable Corporation, for price fixing. Both enter pleas of no contest and appropriate judgments are entered. Subsequent to this action, Square Corporation sues both Box and Cable for treble damages of $6,000,000. In settlement, Box and Cable each pay Square $1,200,000. What is the maximum amount that Box and Cable may each deduct? A) $400,000 B) $1,200,000 C) $2,000,000 D) $6,000,000
A) $400,000 $1,200,000/3 = $400,000
Nikki is a single taxpayer who owns a vacation cottage on the lake. During the year, she rented it for $2,000 for 14 days, lived in it for 56 days, and left it vacant the remainder of the year. The year's expenses amounted to $5,000 interest expense, $800 property taxes, $1,500 utilities and maintenance, and $2,400 depreciation. Using the IRS method of allocating expenses, how much of the property-related expenses will be deductible for AGI? A) 0 B) $2,000 C) $1,940 D) $9,700
A) 0 When property is rented for 14 days or less, the property is treated as 100% personal. None of the expenses are deductible for AGI, but none of the rental income has to be reported.
Which of the following statements is false? A) A tax deduction is allowed to a taxpayer for estimated warranty expense. B) A tax deduction is allowed in association with a warranty only in the year in which warranty work is performed. C) A tax deduction is allowed for a contested amount if the amount is paid prior to final settlement. D) No tax deduction is allowed to an accrual basis taxpayer for the amount of a down payment for a non-recurring expense when the work is to be performed in a subsequent period.
A) A tax deduction is allowed to a taxpayer for estimated warranty expense. No tax deduction is allowed until warranty work is actually done.
Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received? A) The liability must be paid. B) The existence of a liability must be established. C) The amount of the liability is determined with reasonable accuracy. D) The services must actually be provided.
A) The liability must be paid. There is no requirement for an accrual basis taxpayer to pay an expense in order to get a deduction.
Brent must substantiate his travel and entertainment expenses. Which of the following is not required for documentation? A) company expense report B) business relationship to the taxpayer of individuals entertained C) purpose of the expenditure D) time and place of the travel or entertainment
A) company expense report All but the company expense report are specifically required under the substantiation rules.
Which of the following is not required for an expenditure to be deductible as a business or investment expense? A) recurring in nature B) ordinary and necessary C) reasonable in amount D) incurred by the taxpayer
A) recurring in nature
Leigh pays the following legal and accounting fees during the year: Legal fees in connection with a contract dispute in her trade or business $8,800 Legal fees related to resolving a tax deficiency related to business 4,000 Tax return preparation fees: Allocable to Schedules A and B 1,000 Tax return preparation fees: Allocable to Schedule C 1,200 Legal fees incident to a divorce 5,000 What is the total amount of her for AGI deduction for these fees? A) $10,800 B) $14,000 C) $15,000 D) $20,000
B) $14,000 $8,800 + $4,000 + $1,200 = $14,000; the tax return fees allocable to Schedules A and B would be itemized deductions, and legal fees incident to a divorce would not generally be deductible.
Maria pays the following legal and accounting fees during the year: Legal fees in connection with ongoing operations of a trade or business $4,000 Legal fees related to purchase of personal residence 2,600 Legal fees related to tax deficiency related to Schedule A itemized deductions 500 Tax return preparation fees: Allocable to preparation of Schedule C 2,000 Tax return preparation fees: Allocable to preparation of remainder of return 2,100 What is the total amount of her for AGI deduction for these fees? A) $4,000 B) $6,000 C) $8,100 D) $11,200
B) $6,000 $4,000 business legal fees + 2,000 business accounting fees = $6,000
Laura, the controlling shareholder and an employee of Southwest Corporation, receives an annual salary of $750,000. Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably-sized corporations, the IRS contends that Laura's salary should be no higher than $600,000. The Court upheld the IRS's position. As a result, which of the following is true? A) $600,000 is deductible by the corporation; $600,000 is taxable to Laura. B) $600,000 is deductible by the corporation; $750,000 is taxable to Laura. C) $750,000 is deductible by the corporation; $750,000 is taxable to Laura. D) $750,000 is deductible by the corporation; $600,000 is taxable to Laura.
B) $600,000 is deductible by the corporation; $750,000 is taxable to Laura. The corporation is entitled a deduction for $600,000 which is considered "reasonable." However, the entire amount is taxable to Laura—$600,000 as salary and $150,000 as a dividend.
Bart owns 100% of the stock of Octo Corporation, which uses the accrual method. Bart's sister Samantha, a cash method taxpayer, did some advertising work for Octo in November 2014. In December, Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2015. Samantha is a calendar year taxpayer. When may Octo deduct the $5,000? A) 2014 B) 2015 C) Either 2014 or 2015 D) The expense is not deductible since Samantha is Bart's sister.
B) 2015 Octo and Samantha are related parties under the constructive ownership rules of Section 267. Octo may not take a deduction until Samantha recognizes the $5,000 in income.
Erin, Sarah, and Timmy are equal partners in EST Partnership. Sarah also owns 40% of Elton Corporation. The remaining shareholders of Elton Corporation are: Erin (24%) and Sarah's uncle (36%). What percent ownership does Sarah directly or constructively own in Elton Corporation? A) 40% B) 64% C) 76% D) 100%
B) 64% Sarah directly owns 40% and constructively owns Erin's (her partner) 24% of the stock, but not her uncle's stock.
Mark and his brother, Rick, each own farms. Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle. Mark purchases $2,000 of feed and gives Rick one-half of the feed. Mark tells Rick that there is no need to repay him and to consider the feed a gift. Which of the following statements is true? A) Mark can deduct $2,000 for the feed. B) Mark can deduct $1,000 for the feed. C) Rick must report $1,000 as income. D) None of the above is true.
B) Mark can deduct $1,000 for the feed. Taxpayers cannot take a deduction for the expense of another person.
Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties. Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies. Kelsey takes the standard deduction each year. The net effect of the cupcake activity on Kelsey's taxable income is A) $0. B) an increase of $1,000. C) a decrease of $300. D) a decrease of $280.
B) an increase of $1,000. Hobby expenses, limited to hobby revenue, are itemized deductions. Kelsey takes the standard deduction so her taxable income will include the full $1,000 revenue, but the hobby expenses will not be deducted at all.
Pamela was an officer in Green Restaurant which subsequently went bankrupt. Pamela started a new restaurant and, to establish goodwill, paid off the debts of $100,000 of Green Restaurant. She was under no obligation to do so. The $100,000 is A) deductible currently as an itemized deduction. B) capitalized because the expenses are not ordinary. C) deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses. D) None of the above.
B) capitalized because the expenses are not ordinary. The payments are not ordinary so they are not currently deductible but must be capitalized.
Assume Congress wishes to encourage healthy eating and is considering a deduction for broccoli purchases. In order to maximize the value of this tax deduction for taxpayers, Congress should provide for a A) miscellaneous deduction. B) deduction for AGI. C) deduction from AGI. D) All of the above would provide the same tax savings to taxpayers
B) deduction for AGI.
On Form 1040, deductions for adjusted gross income include the amounts paid for all of the following except A) alimony. B) home mortgage interest. C) student loan interest. D) moving expenses.
B) home mortgage interest.
Gabby owns and operates a part-time art gallery, now in its fifth year. She views it as a business activity, but she is concerned that the IRS will challenge her classification and consider it a hobby. Her business results, using the cash method of accounting, were net losses in the first and fourth years and small profits in the second and third years. It is now almost year-end and based on projections, the business is showing a small profit of $6,000. Repairs to the security system and to the heating/cooling system were recently completed and these bills total $7,000. When should Gabby pay these bills? A) before year-end to get the current year deduction B) next year C) split into $6,000 this year and $1,000 next year D) It does not matter when she pays the bills. The work was performed this year, so the costs will be deducted this year.
B) next year With profits in only two out of the preceding four years, Gabby will want to report a profit this year. The business is cash basis so paying the bill next year will defer the deduction to next year, resulting in a profit this year. A profit in three out of five years isn't determinative of business (rather than hobby) status, but it shifts the burden of proof to the IRS.
In which of the following situations are points paid on a home mortgage loan not deductible in the year of payment? A) purchase B) refinance C) construction D) improvement
B) refinance The Code specifies that points paid to refinance a home must be capitalized and amortized over the life of the loan.
Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days. For tax purposes, the houseboat is classified as A) neither a residence nor rental property. Because it is rented a nominal number of personal use days, both revenue and expenses (other than those otherwise allowable) are ignored. B) rental property. Expenses in excess of income may be deducted although net income or loss is subject to the passive activity rules. C) property that is treated as a hobby which gives rise to from AGI deductions only. D) a combination of the taxpayer's residence and rental property. The deduction for expenses is limited to the amount of income generated by the property.
B) rental property. Expenses in excess of income may be deducted although net income or loss is subject to the passive activity rules. Since Vanessa's personal use of 25 days does not exceed 10% of the rental days (280 × .10 = 28 days), then the houseboat is not considered a residence under Section 280A. Neither is the use considered nominal since rental days exceed 14. Therefore, the houseboat is classified as rental property.
Abigail's hobby is sculpting. During the current year, Abigail sold three of her sculptures for a total of $3,200. Her related expenses include $1,500 in utilities, $1,200 in supplies and $900 in depreciation. Of the total expenses incurred, Abigail may deduct A) $0. B) $1,500 in utilities and $1,200 in supplies. C) $1,500 in utilities, $1,200 in supplies, and $500 in depreciation. D) $1,500 in utilities, $1,200 in supplies and $900 in depreciation.
C) $1,500 in utilities, $1,200 in supplies, and $500 in depreciation. Since the activity is classified as a hobby, hobby expenses are deductible to the extent of hobby income of $3,200. Further, they are deducted in a specific order—those that are otherwise allowable such as property taxes and interest; those related to the activity other than those that decrease basis; and those that reduce basis (depreciation).
Troy incurs the following expenses in his business, an illegal gambling establishment: Salaries to employees $200,000 Insurance expense 60,000 Utilities expense 70,000 Bribes to police 50,000 His deductible expenses are A) $0. B) $200,000. C) $330,000. D) $380,000.
C) $330,000. $200,000 + $60,000 + $70,000 = $330,000. Bribes of government officials are not deductible.
Dana purchased an asset from her brother for $15,000. Her brother's basis was $20,000. If Dana sells the asset to an unrelated party for $12,000, she will recognize A) $0. B) ($1,000) loss. C) ($3,000) loss. D) ($4,000) loss.
C) ($3,000) loss. Selling Price $ 12,000 Minus: Cost (15,000) Loss ($3,000)
During the current year, Ivan begins construction of an office building and a hotel. He incurs $10,000 in property taxes during the construction of the office building and $15,000 for the hotel. Which of the following statements is true of the property taxes during the construction period? A) Ivan must capitalize the property taxes on both properties each year if an election is made. B) Ivan must deduct the property taxes on both properties each year. C) Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year. D) Ivan may elect to capitalize the property taxes for the properties in one year and then deduct the property taxes on the properties the next year.
C) Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year. Separate elections to capitalize the property taxes are allowed on the different properties.
Sacha, a dentist, has significant investment assets. She holds corporate bonds, municipal bonds, stocks and mutual funds. Sacha paid $1,500 to an investment adviser to conduct a portfolio review and to prepare a recommendation for rebalancing her portfolio. Which of the following statements is correct regarding the tax treatment of the $1,500 fee? A) Sacha can include the full fee as an investment-related expense in her miscellaneous itemized deductions. B) Sacha can include the full fee as an investment-related expense in her "for AGI" deductions. C) Part of the $1,500 fee will be disallowed due to the holding of the municipal bonds. D) The $1,500 fee is not deductible.
C) Part of the $1,500 fee will be disallowed due to the holding of the municipal bonds. Investment-related expenses are deductible, usually as a miscellaneous itemized deductions, but if tax-exempt securities are held, some of the investment expense will be allocated to these securities and disallowed.
For the years 2010 through 2014 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2010, 2011 and 2012 her revenue exceeded the expenses from the activity. In 2013 and 2014, the antique store generated a loss. Which statement is correct? A) The activity is a business. The IRS cannot prove it is a hobby. B) The activity is a hobby. Mary cannot prove it is a business. C) The activity is presumed to be a business. However, the IRS may prove it is a hobby. D) The activity is presumed to be a hobby. However, Mary may prove it is a business.
C) The activity is presumed to be a business. However, the IRS may prove it is a hobby. Under the presumption rule, if an activity results in income in 3 of 5 years, the burden of proof falls to the IRS to prove that the activity is a hobby rather than a trade or business.
Carole owns 75% of Pet Foods, Inc. As CEO, Carole must travel extensively and does so on the company jet. In addition, she also uses the jet to take several personal vacations. Carole reports the value of the personal use of the jet, $140,000, as additional compensation. Which of the following is true in terms of the corporation? A) The corporation includes $140,000 as miscellaneous income. B) The $140,000 has no impact on the corporation's income tax. C) The corporation takes a deduction of $140,000 for compensation expense. D) The corporation takes a deduction of $140,000 for dividend expense.
C) The corporation takes a deduction of $140,000 for compensation expense. Because the $140,000 is considered taxable compensation to Carole, the corporation gets a related compensation expense deduction.
Various criteria will disqualify the deduction of a business or investment related expenditure. Which of the following criteria will not disqualify a business or investment expenditure? A) capital expenditure B) expenses related to tax-exempt income C) expenses are not incurred annually D) expenses are illegal or in violation of public policy
C) expenses are not incurred annually
Juanita knits blankets as a hobby and sells them. In the current year, she earns $5,000 from her blanket sales and incurs expenses of $600. Juanita does not itemize deductions. On her tax return, she should A) report $5,000 of hobby income and deduct $500 of hobby expenses from AGI. B) report $5,000 of hobby income and deduct $400 of hobby expenses for AGI. C) report $5,000 of hobby income and deduct nothing from AGI since Juanita does not itemize deductions. D) report no hobby income and no hobby deductions.
C) report $5,000 of hobby income and deduct nothing from AGI since Juanita does not itemize deductions. A deduction for hobby expenses is only available to taxpayers itemizing deductions.
Which of the following individuals is not considered a relative for purposes of the related parties loss disallowance rules under Sec. 267? A) brother B) husband C) sister-in-law D) grandfather
C) sister-in-law A husband, brother, and grandfather are all considered related parties under Section 267, and any loss on a sale to them would be disallowed.
Under the accrual method, recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for A) the all-events test is met. B) the expense is recurring. C) the expense is material. D) economic performance occurs within the shorter of 8 1/2 months after the close of the year or a reasonable period after the close of the year.
C) the expense is material. There is no requirement that the expense be material.
Samuel, a calendar year taxpayer, owns 100 shares of R Corporation common stock which was purchased two years ago for $3,600. Samuel sells all 100 shares on December 27 of the current year for $1,000. On January 4 of the following year, Samuel purchases 40 shares of R Corporation preferred stock. Samuel's recognized loss will be A) $0. B) $960. C) $1,040. D) $2,600.
D) $2,600. Preferred stock is not considered substantially identical to common stock of the same corporation and wash sale rules will not apply. Therefore, the loss of $2,600 ($1,000 - $3,600) is allowed.
Toby, owner of a cupcake shop in New York, is considering opening a similar business (i.e., a cupcake shop) in Phoenix. After spending $4,200 investigating such possibilities in Phoenix, Toby decides against opening the store. What is the maximum amount of deduction for the current year attributable to these expenditures? A) $0 B) $420 C) $840 D) $4,200
D) $4,200 Business investigation expenses of a taxpayer who is already engaged in a similar trade or business are fully deductible in the year incurred regardless of whether or not the taxpayer goes into the new business.
During the current year, Martin purchases undeveloped land as an investment. Martin intends to rent the land as pastureland and hopefully sell it later for a profit. In the current year, Martin receives no rent but he does pay taxes of $2,800, mortgage interest of $900 and liability insurance of $500. How much of these expenses can Martin deduct (before any limitations) on his current tax return? A) $0 B) $1,400 C) $3,700 D) $4,200
D) $4,200 $2,800 + $900 + $500 = $4,200. These are ordinary and necessary expenses related to the income he hopes to produce.
Emeril borrows $340,000 to finance taxable and tax-exempt investments. He incurs $18,000 investment interest expense, allocated equally between the taxable and tax-exempt investments. Ignore any possible investment interest expense limitation. How much of the interest expense is deductible, and where is it deductible? A) $18,000 for AGI B) $18,000 from AGI C) $9,000 for AGI D) $9,000 from AGI
D) $9,000 from AGI Interest incurred to acquire tax-exempt investments is not deductible. Deductible investment interest expense is not enumerated in Sec. 62 as a "for AGI" deduction so it is a "from AGI" deduction.
Deductions for AGI may be located A) on the front page of Form 1040. B) on Schedule C as a deduction. C) on Schedule E as a deduction. D) All of the above are true.
D) All of the above are true.
Paul, a business consultant, regularly takes clients and potential clients out to dinner. In order to deduct these expenses, Paul must maintain records substantiating all of the following except: A) the time and place of the dinners. B) the business relationship with the person invited. C) the business purpose of the dinners. D) All of the above information must be substantiated in order to deduct the entertainment costs.
D) All of the above information must be substantiated in order to deduct the entertainment costs. In order to deduct travel, entertainment, transportation and gifts, very strict recordkeeping requirements apply, including maintaining all of the information noted in the responses.
Which of the following factors is important in distinguishing between capital and revenue expenditures? A) The expenditure improves the property, adding to the value of the property. B) The expenditure provides a betterment, adding to the value of the property. C) The expenditure restores the property. D) All of the above.
D) All of the above. All of the specified factors are important in distinguishing between capital and revenue expenditures.
During 2014 and 2015, Danny pays property taxes of $3,500 each year on a piece of land. During 2014, the land is vacant and unproductive. In 2015, Danny uses the land as a parking lot and generates $16,000 in income. Which of the following is true regarding the property taxes? A) Capitalize $3,500 each year. B) Deduct $3,500 each year. C) Capitalize $3,500 in 2014 and deduct $3,500 in 2015. D) Either B or C is acceptable.
D) Either B or C is acceptable. A taxpayer may elect to capitalize the expenses on unimproved and unproductive real estate each year. Therefore, Danny may either capitalize or deduct the $3,500 in 2014 but he must deduct the $3,500 in 2015.
For the years 2010 through 2014 (inclusive) Max, a surgeon, has been involved in bowling competitions. Only in 2013 and 2014 did his revenue exceed the expenses from the activity. Which statement is correct? A) The activity is a business. The IRS cannot prove it is a hobby. B) The activity is a hobby. Max cannot prove it is a business. C) The activity is presumed to be a business. However, the IRS may prove it is a hobby. D) The activity is presumed to be a hobby. However, Max may prove it is a business.
D) The activity is presumed to be a hobby. However, Max may prove it is a business. Under the presumption rule, if an activity results in a loss for 3 of 5 years, the burden of proof falls to the taxpayer to prove that the activity is a business rather than a hobby.
Self-employed individuals may claim, as a deduction for adjusted gross income, 50 percent of their A) traditional IRA contributions. B) disability insurance premiums. C) health insurance premiums. D) self-employment tax.
D) self-employment tax.
Which of the following factors is not used to determine whether an activity is a hobby or a business? A) the taxpayer's expertise in the activity B) the taxpayer's financial status C) the personal pleasure derived from the activity D) the success of the taxpayer in other dissimilar activities
D) the success of the taxpayer in other dissimilar activities Success in dissimilar activities would not be relevant.
Deductions for adjusted gross income include all of the following except A) contributions to certain retirement plan arrangements. B) alimony. C) expenses attributable to production of rental income. D) unreimbursed employee business expenses.
D) unreimbursed employee business expenses.
