Chapter 6-8

Al is single, age 60, and has gross income of $140,000, of which $120,000 is salary and $20,000 is rental income. His deductible expenses are as follows: Charitable contributions $4,000 Contribution to a traditional IRA 7,000 Expenses paid on rental property 7,500 Interest on home mortgage and property taxes on personal residence 7,200 State income tax 2,200 What is Al's AGI? a. $140,000. b. $125,500. c. $133,000. d. $113,000.

b. $125,500. Al's AGI is calculated as follows: Gross income $140,000 Deductions for AGI: IRA $7,000 Expenses on rental property 7,500 =(14,500) = AGI $125,500

On July 10, 2024, Ariff places in service a new SUV that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2024, assuming Ariff's § 179 business income is $110,000. Ariff does not take additional first-year depreciation. a. $30,500 b. $38,400 c. $14,000 d. $70,000

b. $38,400 Since the SUV weighs over 6,000 pounds, it is not subject to the statutory dollar limits on luxury automobiles. § 179 expensing (limited to $30,500 for such SUVs) $30,500 Regular MACRS [($70,000 - $30,500) × 0.20] 7,900 = Total $38,400

On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago, Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery? a. $70,000 b. $90,000 c. $140,000 d. $120,000

b. $90,000 The basis is $90,000, the lower of the adjusted basis ($120,000) or fair market value ($90,000) at the date of conversion. The mortgage of $50,000 does not affect adjusted basis.

Which of the following is deductible in 2024? a. Moving expenses in excess of reimbursement. b. Cash contribution to the Salvation Army, a qualified charity. c. Allowable hobby expenses in excess of hobby income. d. Tax return preparation fees of an individual.

b. Cash contribution to the Salvation Army, a qualified charity. Miscellaneous itemized deductions subject to the 2% of AGI floor are not deductible in 2024. Moving expenses are deductible by military personnel.

Which of the following is not relevant in determining whether an activity is profit seeking or a hobby? a. Whether the activity is enjoyed by the taxpayer. b. The expertise of the taxpayers and time and effort expended. c. The relationship of profits earned and losses incurred. d. All of these choices are relevant factors.

d. All of these choices are relevant factors. All of these items are relevant factors in determining whether an activity is profit seeking or a hobby.

Which of the following events would produce a deductible loss in 2024? a. A misplaced diamond ring. b. Termite infestation of a personal residence over a several year period. c. Erosion of personal use land due to rain or wind. d. Damages to personal residence from hurricane in a Federal disaster area.

d. Damages to personal residence from hurricane in a Federal disaster area. Only "Damages to personal residence from hurricane in a Federal disaster area" occurred in a Federally declared disaster area.

Which of the following depreciation conventions are not used under MACRS? a. Mid-month. b. Half-year. c. Mid-quarter. d. Full-month.

d. Full-month.

If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct? a. All rental income is included in gross income. b. All rental related expenses that are deductible are classified as deductions from AGI. c. Expenses must be allocated between rental and personal use. d. Only "All rental income is included in gross income" and "Expenses must be allocated between rental and personal use" are correct.

d. Only "All rental income is included in gross income" and "Expenses must be allocated between rental and personal use" are correct. The allowable rental deductions are classified as deductions for AGI. (Any remaining property taxes and mortgage interest are deductible from AGI as itemized deductions.)

Which of the following is not a required test for the deduction of a business expense? a. Ordinary b. Reasonable c. Necessary d. Unavoidable

d. Unavoidable Business expenses must be ordinary and necessary to be deductible. In addition, they must be reasonable in amount. Unavoidable is not a requirement.

In 2023, Mei had a § 179 deduction carryover of $30,000. In 2024, she elected § 179 for an asset acquired at a cost of $115,000. Mei's § 179 business income limitation for 2024 is $140,000. Determine Mei's § 179 deduction for 2024. a. $140,000 b. $115,000 c. $130,000 d. $25,000

a. $140,000 $140,000 [ $30,000 + $115,000 (limited to $140,000)].

James purchased a new business asset (3-year MACRS property) on July 23, 2024, at a cost of $40,000. James takes additional first-year depreciation but does not elect § 179 expense on the asset. Determine the cost recovery deduction for 2024. a. $29,280 b. $40,000 c. $26,666 d. $8,333

a. $29,280 Additional first-year depreciation ($40,000 × 60%) $24,000 MACRS cost recovery [($40,000 − $24,000) × 0.33 (Exhibit 8.3)] 5,280 = Total cost recovery deduction $29,280

Cora purchased a hotel building on May 17, 2024, for $3,000,000. Determine the cost recovery deduction for 2025. a. $76,920 b. $59,520 c. $69,000 d. $48,150

a. $76,920 The hotel building is nonresidential realty. 0.02564 × $3,000,000 = $76,920.

Regarding research and experimental expenditures, which of the following are not qualified expenditures? a. Costs of ordinary testing of materials. b. Costs to develop a plant process. c. Depreciation on a building used for research. d. Costs of developing a formula.

a. Costs of ordinary testing of materials.

During 2023, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2024. What is the amount of the deduction for salary expense? a. If Silver uses the accrual method, $195,000 in 2023 and $0 in 2024. b. If Silver uses the cash method, $175,000 in 2023 and $0 in 2024. c. If Silver uses the accrual method, $175,000 in 2023 and $20,000 in 2024. d. If Silver uses the cash method, $0 in 2023 and $195,000 in 2024.

a. If Silver uses the accrual method, $195,000 in 2023 and $0 in 2024.

Which of the following is not a "trade or business" expense? a. Parking ticket paid on business auto. b. Interest on business indebtedness. c. Depreciation on business property. d. Property taxes on business property.

a. Parking ticket paid on business auto.

Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? a. Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya). b. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. c. Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis). d. Only "Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis)" and "Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya)" are correct.

b. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. Nikeya's realized loss of $25,000 ($95,000 amount realized - $120,000 adjusted basis) is disallowed because Shamed is a related party. Shamed's adjusted basis for the land is his cost of $95,000. However, when he sells the land for $112,000, his realized gain of $17,000 ($112,000 amount realized - $95,000 adjusted basis) is not recognized because he can offset it against $17,000 of Nikeya's $25,000 disallowed loss in calculating his taxable income.

Cory, a college professor, incurred and paid the following expenses in 2024: 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). a. $4,600. b. $3,000. c. $1,500. d. $5,000.

c. $1,500. Only the rental property expenses are deductible.

Hazel purchased a new business asset (5-year property) on September 30, 2024, at a cost of $100,000. On October 4, 2024, she placed the asset in service. This was the only asset she placed in service in 2024. Hazel did not elect § 179 or additional first-year depreciation. On August 20, 2025, Hazel sold the asset. Determine the cost recovery for 2025 for the asset. a. $19,000 b. $14,250 c. $23,750 d. $38,000

c. $23,750 The asset was placed in service in October 2024 (and was the only asset placed in service in 2024); as a result, the mid-quarter convention is used. 2025 is the second year of cost recovery. [$100,000 × 0.38 × (2.5/4) = $23,750.]

Simpson Company, a calendar year taxpayer, acquires an apartment building on March 22, 2024, for $900,000. What is the maximum cost recovery deduction it may take for 2024? a. $31,365. b. $22,617. c. $25,911. d. $18,297.

c. $25,911. An apartment building is residential real property. The mid-month convention applies. So, 2024 cost recovery is $25,911; $900,000 × 0.02879.

Hannah is a teacher, single, had gross income of $50,000, and incurred the following expenses in 2024: Charitable contribution $2,000 Taxes and interest on home 7,000 Legal fees incurred in a tax dispute 1,000 Medical expenses 3,000 Supplies for her third grade class 350 Her AGI is: a. $39,700. b. $39,750. c. $49,700. d. $40,000.

c. $49,700. Hannah's AGI is calculated as follows: Gross income $50,000 Deductions for AGI: Supplies for her third grade class ($300 limit in 2024) (300) = AGI $49,700

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida and wants to expand to other states. During the current year, 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: a. Capitalize $14,000 and not deduct $9,000. b. Expense $9,000 in the current year and capitalize $14,000. c. Expense $23,000 in the current year. d. Capitalize $23,000.

c. Expense $23,000 in the current year. As Iris owns and operates TV rental outlets, all of the investigation expenses can be deducted regardless of whether she acquires the businesses.

If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct? a. No expenses are deductible. b. Expenses must be allocated between rental and personal use. c. No income is included in AGI. d. Only "No income is included in AGI" and "No expenses are deductible" are correct.

c. No income is included in AGI. Expenses that would otherwise be deductible (e.g., property taxes and interest on mortgage of personal residence) can be claimed ("No expenses are deductible").

Which of the following is not a related party for constructive ownership purposes under § 267? a. The taxpayer's brother. b. A corporation owned more than 50% by the taxpayer. c. The taxpayer's aunt. d. The taxpayer's grandmother.

c. The taxpayer's aunt. Taxpayer's aunt is not a related party under § 267.

Ramon, a cash basis calendar year taxpayer, runs a bingo operation that is illegal under state law. During the current year, a bill designated H.R. 9 is introduced into the state legislature, which, if enacted, would legitimize bingo games. In the current year, Ramon had the following expenses: Operating expenses in conducting bingo games $247,000 Payoff money to state and local police 24,000 Newspaper ads supporting H.R. 9 3,000 Political contributions to legislators who support H.R. 9 8,000 Of these expenditures, Ramon may deduct: a. $258,000. b. $282,000. c. $250,000. d. $247,000.

d. $247,000. Ramon can deduct only the $247,000 of operating expenses.

Khalid, who is single, reports the following items for 2024: Salary $40,000 Interest income on U.S. Treasury bonds 8,000 Loss on theft of securities (60,000) Interest income on New York state bonds 12,000 What is Khalid's NOL for 2024? a. ($10,000) b. ($24,050) c. ($16,100) d. ($12,000)

d. ($12,000) Salary $40,000 Interest income 8,000 = AGI $48,000 Less: Itemized deductions (60,000) = Taxable income ($12,000) = Net operating loss ($12,000) The loss on the theft of securities is treated as attributable to a trade or business. Therefore, it can create an NOL. The interest of $12,000 on the New York state bonds is tax-exempt.