TAX Chapter 6

A nonbusiness bad debt is deductible for tax purposes as a(n): A) Short-term capital loss B) Itemized deduction C) Long-term capital loss D) Ordinary business deduction

A

Costs incurred in investigating the creation or acquisition of an active trade or business are classified as: A) acquisition costs. B) start-up costs. C) organizational expenditures. D) none of the above.

B

If rental payments are paid in advance, they are usually deductible by a taxpayer: A) When paid B) In the period covered by the payments C) Over a one-year period D) When paid or incurred as elected by the taxpayer

B

Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: A) 30 months B) 60 months C) 90 months D) 120 months

B

For individual taxpayers, deductible losses for tax purposes do not include: A) Business losses B) Investment losses C) Personal losses D) Personal casualty or theft losses

C

Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business: A) Only if the individual actually finds a new job B) Regardless of whether the individual finds a new job C) If the expenses relate to the individual's first job D) Both (a) and (b)

C

The Cohan rule has to do with: A) Tax accounting methods B) Debts of another taxpayer C) Substantiation of deductions D) Cash method of accounting

C

Which of the following types of taxes is not deductible? A) State property taxes. B) State income taxes. C) Federal income taxes. D) All of the above types of taxes are deductible.

C

A business bad debt is deductible for tax purposes as a(n): A) Short-term capital loss B) Itemized deduction C) Long-term capital loss D) Ordinary business deduction

D

A business tax deduction for business gifts is restricted to $25 per year per: A) Individual donor B) Salesman C) Business establishment D) Individual donee

D

A nonbusiness bad debt is always treated as a long-term capital loss for tax purposes.

False. A nonbusiness bad debt is always treated as a short-term capital loss.

Moving expenses are deductible if the taxpayer's move is required in order for him or her to accept employment.

False. Following passage of the Tax Cuts & Jobs Act of 2017, moving expenses are no longer deductible.

A taxpayer can claim a transportation deduction equal to 50 cents per mile traveled in a passenger automobile for business purposes.

False. For 2020, the mileage allowance is 57.5 cents per mile.

Although ordinary expenses may not be necessary, necessary expenses are always ordinary.

False. For example, legal expenses incurred in connection with a taxpayer's personal conduct may be necessary to protect the taxpayer's business, but are not ordinary business expenses.

Hobby expenditures are deductible to the extent of hobby gross income.

False. Hobby expenditures, with possible exceptions for interest and taxes, are no longer deductible.

Transportation expenses are deductible only if the taxpayer is away from home overnight.

False. Transportation expenses are deductible if incurred in connection with the taxpayer's trade or business.

The determination of whether legal expenses are deductible as a business expense is based on whether the legal issue at stake would significantly affect the taxpayer's business.

False. Whether or not legal expenses are deductible depends on the nature of the transaction or activity from which the legal challenge is derived.

To be deductible for tax purposes, trade or business expenses must be: A) Ordinary and necessary B) Reasonable in amount C) Related to an activity which is deemed to be a trade or business D) All of the above

D

A deduction for salaries and wages can include: A) Bonus payments B) Payments for services performed in prior years C) Advance payments for services to be performed in future years D) Both (a) and (b)

D

Dealers in illegal drugs can deduct: A) All ordinary and necessary business expenses B) Cost of goods sold C) Fines and penalties paid to the government for the violation of a law D) None of the above

D

Deductions for AGI are: A) Always deductible B) Deductible if they exceed the taxpayer's standard deduction C) A flat allowance given to all taxpayers D) Never deductible

A

A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayer's taxable income derived from the natural resource for the year before deducting the depletion deduction? A) 50 percent B) 65 percent C) 75 percent D) 85 percent

A

Employee travel expenses are deductible: A) For AGI B) From AGI C) For or from AGI depending on the type of travel expense D) For AGI unless excess reimbursement is received

A

The IRS takes the position that a taxpayer's tax home, for purposes of determining travel expenses, is at the location of the taxpayer's: A) Principal place of business B) Personal residence C) Principal place of business or personal residence, whichever results in a lower tax deduction D) Personal residence if located in excess of 50 miles from principal place of business

A

Under the cash method of tax accounting, tax deductions are taken when: A) Expenditures are made B) There is a fixed and determinable liability C) The taxpayer elects to take the deduction D) None of the above

A

Travel expenses must be incurred by a taxpayer while away from home. To the IRS, the term "away from home" means: A) Away from home for a 24-hour period B) Away from home temporarily C) Away from home overnight D) Away from home for a reasonable period of time

C

Fines and penalties paid to the government for the violation of a law are: A) Generally deductible for tax purposes as business expenses B) Not deductible for tax purposes C) Deductible if ordinary and necessary D) Deductible if reasonable in amount

B

For MACRS depreciation purposes, autos and light-duty trucks are depreciated over what period? A) Three years B) Five years C) Ten years D) Fifteen years

B

For tax purposes, the term "research and experimentation expenditures" includes which of the following: A) Efficiency surveys B) Development of a plant process C) Management studies D) Advertising

B

To be deductible for tax purposes, a trade or business expenditure must be: A) Ordinary B) Necessary C) Ordinary and necessary D) Ordinary or necessary

C

Which of the following investment-related expenses are deductible for AGI? A) Safe deposit box rentals B) Investment counseling fees C) Rent and royalty expenses D) Investment custodial fees

C

Hobby expenditures are deductible to the extent of: A) Total individual gross income B) Hobby gross income C) Trade or business gross income D) Nonbusiness gross income

D

If an expenditure is part business-related and part personal: A) The entire expenditure is deductible for tax purposes. B) No part of the expenditure is deductible for tax purposes. C) The personal portion of the expenditure may be deductible for tax purposes. D) Only the business-related portion of the expenditure is deductible for tax purposes.

D

Tax deductions for tax planning and tax compliance expenses may only be claimed for business expenses incurred in planning and compliance with respect to federal and state income taxes.

False. A tax deduction is allowed for business-related tax planning and tax compliance for all types of taxes.

A Code Sec. 197 intangible is amortized based on its actual or estimated useful life.

False. Code Sec. 197 intangibles are amortized over 5 years without respect to their actual or estimated useful lives.

The tax laws generally allow taxpayers to deduct expenses incurred while violating public policy, provided that the expenditure is ordinary and necessary for the taxpayer's trade or business.

False. Expenses incurred in activities that violate public policy are not deductible, regardless of the reason for incurring the expense.

Taxpayers can deduct ordinary and necessary expenses directly attributable to appearances before local legislative councils in connection with legislation that will, or may be expected to, affect the taxpayer's trade or business.

False. Following passage of the TCJA, such expenditures are no longer deductible.

Independent contractors are self-employed individuals who perform services for another individual or business entity and are considered employees of the persons or businesses that hire them.

False. Independent contractors are not employees of the persons or businesses that hire them.

The depreciable life of land is dependent on the type of buildings that have been, or will be, constructed on the land.

False. Land is not depreciable.

A 50 percent deduction is allowed for amounts paid or incurred for dues and fees paid to social, athletic, sporting, or country clubs.

False. No deduction is allowed for amounts paid or incurred for dues and fees paid to social, athletic, sporting, or country clubs.

Business start-up costs are fully deductible in the year in which the taxpayer's trade or business begins.

False. Only $5,000 of start-up costs may be deducted in the year the taxpayer's business begins. The remainder must be amortized.

Taxpayers can deduct the first $5,000 of start-up expenditures incurred during the first year of operations.

False. Only start-up costs incurred up until the beginning of operations are deductible and only if the corporation's total organizational costs do not exceed $50,000 can the first $5,000 of such costs be deducted.

Full worthlessness of a debt must be proven in order to claim a business bad debt deduction.

False. Partial worthlessness of a debt is all that is needed to claim a business bad debt deduction.

Premiums paid on a life insurance policy covering the life of an officer are a tax-deductible business expense if the business is a direct or indirect beneficiary under the policy.

False. Premiums are deductible only if the business is not a direct or indirect beneficiary. If the business is the beneficiary, the premiums are expenses incurred to generate non-taxable income (because life insurance proceeds are not taxable to the beneficiary).

Prepaid interest payments can be deducted in the year of payment regardless of whether the taxpayer uses the cash method or accrual method of accounting.

False. Prepaid interest payments are deducted in the year to which the interest applies.

To qualify for the immediate expensing election under Section 179, eligible property must generally be tangible real property used in a trade or business and be eligible for MACRS.

False. Property must be tangible personal property to qualify for immediate expensing.

Rent and royalty expenses are deductible from adjusted gross income.

False. Rent and royalty expenses are deductible for AGI.

The averaging convention that applies to depreciable property in the year in which it is placed in service is not necessarily the same one used in the year it is disposed of.

False. The taxpayer uses the same averaging convention in both the first and last year that property is depreciated.

Amortization is the systematic recovery (expensing) of an investment in a productive natural resource.

False. The term used to describe this is "depletion."

Acquisition costs a taxpayer incurs in the unsuccessful attempt to acquire a specific business cannot be deducted.

False. These costs can be deducted as losses.

A taxpayer can expense the cost of acquiring a site for a laboratory as well as the costs of constructing a laboratory.

False. These costs must be capitalized and recovered through depreciation deductions.

Advance payments for employee services to be performed in future years are not deductible for tax purposes until the services are actually performed by the employees.

True

Advertising which is intended to influence public reaction to proposed legislation normally is not a deductible business expense for tax purposes.

True

An ordinary expenditure is one which is commonly incurred by other businesses.

True

Federal income taxes paid by a taxpayer in connection with her business are not deductible in computing the business' federal taxable income.

True

Goodwill is subject to amortization for tax purposes.

True

In computing MACRS depreciation, salvage value is ignored.

True

The amount of a bad debt deduction is limited to the adjusted basis of the debt in the hands of the taxpayer.

True

Tangible assets are "depreciated;" intangible assets are "amortized."

True. Amortization is the term used to describe depreciation of intangibles.

Apartment buildings are an example of residential real property.

True. Apartment buildings are depreciable over 27.5 years.

Trucks, SUVs, or vans having a gross vehicle weight rating greater than 6,000 pounds are not subject to the annual depreciation limitations that apply to lighter vehicles.

True. Automobiles with a gross vehicle weight in excess of 6,000 pounds are not considered to be passenger cars and are not subject to these limitations.

Taxpayers can generally deduct ordinary and necessary expenses incurred in connection with an illegal business activity, other than trafficking in drugs.

True. Expenses incurred in conducting an illegal business other than drug trafficking are generally deductible in computing the income earned from such business.

When a business borrows money to purchase tax-exempt bonds, the interest paid on the loan is not deductible.

True. Expenses incurred to generate nontaxable income are not deductible.

For tax purposes, an asset does not necessarily need to decline in value to be a depreciable asset.

True. For example, buildings often appreciate in value over time.

The portion of an employee's salary deemed "unreasonable" may be considered a dividend distribution to an employee that is also a shareholder of the corporation.

True. If the payment does not constitute a legitimate salary payment, it will generally be recharacterized as a dividend to the extent the corporation has earnings & profits.

The research and experimental costs the taxpayer can elect to immediately expense include all such costs incident to the development or improvement of a product.

True. In fact, these costs are often called research and development costs.

Start-up costs can include expenditures incurred to investigate entering into or acquiring a new active trade or business.

True. Investigation of the feasibility of a new business is part of starting up a new trade or business activity.

Taxpayers cannot deduct the costs of tickets to any entertainment activity or facility whether or not the taxpayer's attendance at the activity is related to business.

True. No portion of the cost of tickets to an entertainment activity or facility are deductible even if the taxpayer conducts business immediately before, during, or following the entertainment activity.

A self-employed taxpayer may deduct travel expenses, including duplicate living expenses, if she has to live in a distant location for less than one year in order to conduct her trade or business activity.

True. Note that such expenses are no longer deductible if incurred by an employee (because employee business expenses were deductible as miscellaneous itemized deductions, which were suspended by the Tax Cuts & Jobs Act of 2017.

Percentage depletion is computed without regard to the adjusted basis of the property being depleted.

True. Percentage depletion is computed as a specified percentage of sales proceeds, rather than the cost of the property.

Sales tax paid in connection with the purchase of property used in a business must be treated as part of the cost of the property.

True. Sales taxes, installation and other costs of acquiring property and making it ready for use are capitalized and depreciated.

If a debt becomes worthless, the amount allowed as a bad deduction is the adjusted basis of the debt.

True. The taxpayer's deduction is limited to the actual remaining investment in the debt.

A necessary expense is one that is appropriate or helpful to the continuation of the taxpayer's business; ordinary refers to an expense that is customary and acceptable in the taxpayer's type of business.

True. Trade or business expenses are generally deductible if the taxpayer can demonstrate that they are ordinary and necessary.

The tax laws regarding depreciation allow taxpayers to write off the cost of tangible property over set periods regardless of the actual useful life of the property.

True. Under MACRS, property must be classified into a particular category based on the type of property it is, regardless of its actual useful life.

Cost depletion is computed based on the number of units sold during the year, regardless of the number of units extracted.

True. Units extracted but not sold remain available to the taxpayer, and will increase depletion expense in the year they are ultimately sold.

Personal expenses are only deductible if the tax laws specifically state that they are.

True. Unlike trade or business expenses, which are deductible if necessary and ordinary, personal expenses are generally not deductible. The Code does, however, allow certain personal expenses to be deducted as itemized deductions.