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Exam 5: Business Deductions

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Question 1

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Kitty runs a brothel (illegal under state law) and has the following items of income and expense.What is the amount that she must include in taxable income from her operation? $\begin{array} { l l r } \text { Income } & & \$ 200,000 \\\text { Expenses: } & & \\& \text { Rent } & 8,000 \\& \text { Utilities } & 2,000 \\& \text { Bribes to police } & 10,000 \\& \text { Office supplies } & 5,000 \\& \text { Legal fees } & 20,000 \\& \text { Depreciation } & 14,000 \\& \text { Illegal kickbacks } & 15,000\end{array}$

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The bribes to po...

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Question 2

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Byron owned stock in Blossom Corporation that he donated to a museum (a qualified charitable organization) on June 8 this year.What is the amount of Byron's deduction assuming that he had purchased the stock for $10,500 last year on August 7, and the stock had a fair market value of $13,800 when he made the donation?

A) $3,300
B) $10,500
C) $12,150
D) $13,800
E) None of the above

F) C) and E)
G) A) and E)

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Question 3

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On June 1, 2017, Red Corporation purchased an existing business.With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent.The patent will expire in 20 years.Determine the total amount that Red may amortize for 2017 for the patent.

Which of the following is not a related party for constructive ownership purposes under § 267?

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used.

Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft.One negotiation is with a U.S.assistant secretary of defense.She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table.Another negotiation is with the minister of defense of a third world country.To complete the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment.Beige makes the payments and closes the deals.How much of these payments are deductible by Beige, Inc.?

In 2016, Gail had a § 179 deduction carryover of $30,000.In 2017, she elected § 179 for an asset acquired at a cost of $115,000.Gail's § 179 business income limitation for 2017 is $140,000.Determine Gail's § 179 deduction for 2017.

Tom purchased and placed in service used office furniture on January 3, 2017, for $40,000.Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes.The accountant also used the same depreciation amounts when filing Tom's income tax returns.On January 10, 2022, Tom sold the furniture.Determine the tax basis of the furniture at the time of the sale.

Hazel purchased a new business asset (five-year asset) on September 30, 2017, at a cost of $100,000.On October 4, 2017, Hazel placed the asset in service.This was the only asset Hazel placed in service in 2017.Hazel did not elect § 179 or additional first-year depreciation.On August 20, 2018, Hazel sold the asset.Determine the cost recovery for 2018 for the asset.

Orange Corporation begins business on April 2, 2017.The corporation reports startup expenditures of $64,000 all incurred last year.Determine the total amount that Orange can elect to deduct in 2017.

White Company acquires a new machine (seven-year property) on January 10, 2017, at a cost of $610,000.White makes the election to expense the maximum amount under § 179, and wants to take any additional first-year depreciation allowed.No election is made to use the straight-line method.Determine the total deductions in calculating taxable income related to the machine for 2017 assuming White has taxable income of $800,000.

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

On July 15, 2017, Mavis paid $275,000 for improvements on a commercial building she owns.Determine the maximum total cost recovery from the improvements in 2017.

Property which is classified as personalty may be depreciated.

If an automobile is placed in service in 2017, the limitation for cost recovery in 2019 will be based on the cost recovery limits for the year 2017.

Alice purchased office furniture on September 20, 2016, for $100,000.On October 10, 2016, she purchased business computers for $80,000.Alice placed all of the assets in service on January 15, 2017.Alice did not elect to expense any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year depreciation.Determine the cost recovery deduction for the business assets for 2017. ​

In 2017, Marci is considering starting a new business.Marci incurs the following costs associated with this venture. ​ $\begin{array} { l r } \text { Advertising } & \$ 5,000 \\\text { Travel } & 10,000 \\\text { Market surveys } & 8,000 \\\text { Professional services } & 30,000 \\\text { Interest expense } & 2,000 \\\text { Taxes } & 1,000\end{array}$ Marci started the new business on January 5, 2018.Determine the deduction for Marci's startup costs for 2017.

For personal property placed in service in 2017, the § 179 maximum deduction is limited to $510,000.

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