FIT-Ch. 6

Expenses relating to a hobby, limited to the receipts of the hobby, are deductible as "for AGI" deductions.

False

Fines and penalties are tax deductible if related to the taxpayer's trade or business.

False

Generally, expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.

False

Business interest expense is limited for larger businesses. Which of the following statements is not correct with respect to this limitation? A) Businesses with current year gross receipts exceeding $10 million are subject to this limitation. B) Businesses will add back depreciation and amortization deductions to taxable income in order to calculate the maximum interest deduction. C) The interest expense deduction is limited to business interest income plus 30% of adjusted taxable income. D) All of the above statements are accurate statements with respect to calculating the interest expense limitation.

A

All of the following deductible expenses are deductions for AGI except A) deductions reported on Schedule A. B) deductions reported on Schedule C. C) deductions reported on Schedule E. D) All of the above are deductions for AGI.

A

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

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

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

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

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

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

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

Pat, an insurance executive, contributed $1,000,000 to the reelection 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

RollerQueens Inc., a calendar-year accrual method taxpayer, enters into a contract each September with a cleaning service to clean the arena after each game during the team's October through March season. Under the criteria of the economic performance test, the RollerQueens Inc.'s deduction for cleaning expense A) is allowed in full in the year RollerQueens Inc. and the cleaning service enter into the contract. B) is not allowed until the cleaning service contract is fully satisfied in the following year. C) must be amortized over the contract period. D) is not allowed until payment is made.

A

Tory considered opening a cupcake store in Denver. Tory is currently a full-time dentist. After spending $8,600 on a market study, he decided against opening the store on August 1. What is the maximum amount of deduction for the current year attributable to this expenditure? A) $0 B) $5,000 C) $5,600 D) $6,800

A

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

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

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

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(n) A) itemized deduction. B) deduction for AGI. C) deduction from AGI. D) All of the above would provide the same tax savings to taxpayers.

B

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 2019. In December, Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2020. Samantha is a calendar-year taxpayer. When may Octo deduct the $5,000? A) 2019 B) 2020 C) Either 2019 or 2020 D) The expense is not deductible since Samantha is Bart's sister.

B

Deductions for adjusted gross income include the amounts paid for all of the following except A) one-half of self employment tax. B) home mortgage interest. C) student loan interest. D) contributions to a Health Savings Account.

B

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

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

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

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) an increase of $300.

B

Laura, the controlling shareholder and an employee of Southtown 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

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

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

Three years ago, Myriah refinanced her home mortgage and was required to pay two points on the refinanced loan. The loan was secured by the property, and the charging of points was the established lending practice in the area. The term of the loan was 20 years. Myriah sold the house earlier this year and paid off the refinanced mortgage. In this year of the home sale, is Myriah allowed any deduction with respect to the points paid on the refinanced mortgage? A) Yes, she can deduct the full amount of the refinanced loan points in the year of sale because none of these points have been previously deducted. B) Yes, she can deduct the unamortized balance of the refinanced loan points in the year of sale. C) No, the full amount of the refinanced loan points were already deducted in the year the home mortgage was refinanced. D) No, points paid to refinance a home mortgage are never deductible.

B

To be tax deductible by an accrual-basis taxpayer, 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

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, not allowing any deductions. 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

One of the criteria to be satisfied in order for a business to deduct an expense is that the expense be "necessary." In applying this standard, case law has determined that necessary means A) indispensable if the business is to succeed. B) mandated by law. C) appropriate and helpful to the business. D) none of the above.

C

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, $40,000, as additional compensation. Which of the following is true in terms of the corporation? A) The corporation includes $40,000 as miscellaneous income. B) The $40,000 has no impact on the corporation's income tax. C) The corporation takes a deduction of $40,000 for compensation expense. D) The corporation takes a deduction of $40,000 for dividend expense.

C

Doug, a self-employed consultant, has been a firm believer in maintaining a paperless office. Unfortunately, he recently lost all of his business records in a ransomware attack, and his backup system was also compromised. Which of the following tax doctrines and cases should Doug investigate to better understand substantiation requirements for business expenses? A) the tax benefit rule B) the Corn Products doctrine C) the Cohan rule D) the Arkansas Best doctrine

C

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

FIFO Corporation, a public-traded corporation, pays its CFO a basic salary of $900,000 and a $500,000 bonus awarded for exceptional service. Her compensation package is considered reasonable compensation when compared to other similar corporations and her level of responsibilities. FIFO can deduct A) $500,000. B) $900,000. C) $1,000,000. D) $1,400,000.

C

For the years 2015 through 2019 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2015, 2016 and 2017 her revenue exceeded the expenses from the activity. In 2018 and 2019, 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

Juanita knits blankets as a hobby and occasionally sells them. In the current year, she earns $5,000 from her blanket sales and incurs expenses of $600. On her tax return, she should A) report $5,000 of hobby income and deduct $600 of hobby expenses from AGI. B) report $5,000 of hobby income and deduct $600 of hobby expenses for AGI. C) report $5,000 of hobby income, but she will not be able to take any deductions. D) report no hobby income and no hobby deductions.

C

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

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

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

18) Deductions for AGI may be located A) Schedule 1 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

Deductions for adjusted gross income include all of the following except A) contributions to certain retirement plan arrangements. B) professional fees and supplies paid by elementary and high school teachers. C) expenses attributable to production of rental income. D) unreimbursed employee business expenses.

D

During 2019 and 2020, Danny pays property taxes of $3,500 each year on a piece of land. During 2019, the land is vacant and unproductive. In 2020, 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 2019 and deduct $3,500 in 2020. D) Either B or C is acceptable.

D

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

For the years 2015 through 2019 (inclusive) Max, a surgeon, has been involved in bowling competitions. Only in 2018 and 2019 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

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

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

The Super Bowl is played in Tasha's home town. Tasha moves out of her house for 10 days and stays with her parents. She rents her house for a very high fee to a crew from ESPN. With respect to this rental activity, Tasha will A) report the rental income but be allowed a deduction for AGI for the related expenses (e.g., interest, taxes, utilities, depreciation). B) report the rental income but be allowed a deduction from AGI for the related expenses (e.g., interest, taxes, utilities, depreciation). C) report the rental income, but she will not be allowed any deductions other than the mortgage interest and property taxes. D) not be required to report the income, but she will not take any deductions other than her normal mortgage interest and property taxes.

D

Toby, owner of a cupcake shop in New York, had been considering opening a similar business (i.e., a cupcake shop) in Phoenix. After spending $6,800 investigating such possibilities in Phoenix, Toby decided against opening the store on July 1. What is the maximum amount of deduction for the current year attributable to these expenditures? A) $0 B) $5,000 C) $5,600 D) $6,800

D

Toni owns a gourmet dog treat shop downtown. She spends $2,800 investigating opening another dog treat shop in Northtown and an additional $3,100 investigating a new location in Southtown. Toni does open the Northtown shop, but does not open the Southtown shop. A) Toni must capitalize and amortize the Northtown investigation costs, but can immediately deduct the Southtown investigation costs. B) Toni must capitalize and amortize the Northtown investigation costs, but the Southtown investigation costs are not deductible at all. C) Both the Northtown and the Southtown investigation costs must be capitalized and amortized. D) Both the Northtown and the Southtown investigation costs are currently deductible.

D

Under current tax law, a taxpayer has a choice of immediately deducting or capitalizing and amortizing current year research costs. When weighing this decision, the taxpayer should consider A) expiring tax deduction carryovers. B) current and future marginal tax rates. C) time value of money. D) all of the above.

D

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

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 business success of the taxpayer in other dissimilar businesses

D

If an activity produces a profit for at least two years during a consecutive five-year period, the burden of proof shifts to the IRS to show that the activity is not profit-motivated.

False

Brienne sells land to her brother, Abe, at a loss. A few years later, Abe sells the land to an unrelated party for a substantial gain. Brienne can recognize her realized loss on the land when Abe sells the land to an unrelated party.

False

Expenses paid with a credit card are deductible at the time a cash-basis taxpayer pays for the charge.

False

Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.

False

A change to adjusted gross income cannot affect a taxpayer's itemized deductions.

False

A deduction will be allowed for an expenditure unless the Internal Revenue Code specifically disallows it.

False

A partnership is owned by three individuals. The partnership generated $15 million of gross receipts per year on average from sales of its inventory. While the inventory is a material income-producing factor, the partnership records inventories as incidental supplies in its internal accounting. For tax purposes, the partnership will not be allowed the cash method of accounting.

False

A single taxpayer has adjusted gross income of $325,000 and has total itemized deductions in various categories totaling $20,000. The taxpayer discovers some additional deductions for AGI. The extra deductions can not affect his itemized deductions.

False

A small business uses the accrual method of accounting for its financial statements. It must also use the accrual method for computing taxable income.

False

A sole proprietor contributes to the election campaign of a state governor. The candidate has promised to change a law that severely limits the growth of the sole proprietor's business. Given the direct benefit, the sole proprietor can deduct the contribution.

False

A sole proprietor paid legal fees in connection with the acquisition of a building that he uses in his business. The sole proprietor can deduct the legal fees for AGI.

False

A wash sale occurs when a taxpayer realizes a loss on the sale of stock or securities and the taxpayer acquires substantially identical stock or securities within a 61-day period after the date of sale.

False

According to the tax formula, individuals can deduct the greater of for AGI deductions or from AGI deductions.

False

Accrual-basis taxpayers are allowed to deduct expenses when they meet either the economic performance test or the all-events test.

False

In 2019 the IRS audits a company's 2017 tax return and determines that the president's salary was excessive and disallowed $100,000 of the salary deduction. Under the terms of the hedge (payback) agreement in the corporate bylaws, the president repays $100,000 of her salary to her employer in 2017. The president will amend her 2017 tax return to get a refund of the taxes paid on the excess salary.

False

Itemized deductions are deductions for AGI.

False

Kaitlyn owns a hotel in Phoenix, Arizona. The city of Phoenix has proposed legislation to increase the hotel room tax. Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation. Kaitlyn can deduct the $1,000.

False

Kickbacks and bribes paid to federal officials are deductible only if related to the taxpayer's trade or business.

False

Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.

False

Rachel is a self-employed business consultant. As a necessary and ordinary component of running and growing her business, she incurs significant expenses for travel and business meals with clients, but she has not kept receipts. She will be able to deduct a reasonable amount of these ordinary and necessary expenses under the Cohan rule.

False

Shauna sells 100 shares of UTP Inc. common stock on December 28, 2019 for $10,000. She had purchased these shares three years earlier for $7,000. Shauna again purchases 100 common shares on January 20, 2020 for $9,000. Shauna will not recognize any loss or gain on the stock sale in 2019.

False

Taxpayers may deduct lobbying expenses incurred to influence legislation if the legislation is of direct interest to the taxpayer's trade or business.

False

Tess has started a new part-time business. She is concerned that the IRS will call it a hobby if her return is audited. This first year of business showed a small profit, and she expects it to continue to show modest profits. She would like to take advantage of the three out of five year profit rule to shift the burden of proof to the IRS. Because of the three-year statute of limitations, this will not be possible for the first year of business.

False

2)Fees paid to prepare a taxpayer's Schedule C of the tax return (Profit or Loss from Business) are for AGI deductions.

True

A taxpayer opens a new business this year. Prior to opening, she incurred $45,000 of business investigation and preopening costs. The taxpayer can elect to currently deduct $5,000 and amortize the balance over 180 months.

True

A taxpayer owns a cottage at the beach for family vacations, but also rents it out for one month of the summer. Expenses attributable to the rental use of a taxpayer's vacation home are limited to the gross income generated by the property. The residence is considered to fall into the mixed personal and rental dimension.

True

Adjusted gross income (AGI) is the basis for a number of phase-outs of deductions.

True

An accrual-basis taxpayer may elect to accrue real property taxes ratably over the period to which the taxes relate.

True

An expense is considered necessary if it is "appropriate and helpful" in the taxpayer's business.

True

Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.

True

Capital expenditures add to the value, substantially prolong the useful life, or restore the life of the property.

True

Expenses incurred in a trade or business generally are deductions for AGI.

True

Expenses incurred in connection with conducting a trade or business activity or in connection with production of income are generally deductible, but personal expenses are generally not deductible.

True

Generally, Section 267 requires that the deduction of unpaid (accrued) expenses be deferred until the year in which the related payee recognizes the amount as income.

True

If a loss is disallowed under Section 267, a gain on a subsequent sale of the property by the related purchaser may be offset by the previously unrecognized loss.

True

If property that qualifies as a taxpayer's residence is rented for less than 15 days per year, the taxpayer includes no rental income in gross income and similarly may claim no expenses related to the property other than interest and taxes.

True

In order for an expense to be ordinary, it must be reasonable in amount and it must bear a reasonable and proximate relationship to the income-producing activity or property.

True

Individuals are generally allowed to deduct the greater of the standard deduction or itemized deductions.

True

Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible.

True

Losses incurred on wash sales of stock or securities are generally disallowed in the year of sale.

True

Losses on sales of property between a taxpayer and his/her siblings are disallowed.

True

Losses on the sale of property between a taxpayer and his/her more than 50-percent-owned corporation are disallowed.

True

Points paid in connection with the purchase of a principal residence may be deducted in the year paid.

True

The term "principal place of business" includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.

True

The vacation home limitations of Section 280A may also apply to boats and mobile homes.

True

Under the wash sale rule, if all of the sold shares are not repurchased within the relevant time period, a portion of the loss on the sale is allowed.

True