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Exam 6: Deductions and Losses: in General

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Question 1

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While she was a college student, Angel lived by a bookstore located near campus.She thinks a bookstore located on the other side of campus would be successful.She incurs expenses of $42,800 (legal fees, accounting fees, marketing survey, etc.) in exploring its business potential.Her parents have agreed to lend her the money required to start the business.What amount of these investigation costs can Angel deduct if: a.She opens the bookstore on August 1, 2019. b.She decides not to open the bookstore.

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a.If Angel opens the bookstore on August...

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Question 2

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Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI.

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B) False

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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.?

Terry and Jim are both involved in operating illegal businesses.Terry operates a gambling business and Jim operates a drug-running business.Both businesses have gross revenues of $500,000.The businesses incur the following expenses. $\begin{array} { l r r } & \underline {\text { Terry} } & \underline { \text { Jim } } \\\text { Employee salaries } & \$ 200,000 & \$ 200,000 \\\text { Bribes to police } & 25,000 & 25,000 \\\text { Rent and utilities } & 50,000 & 50,000 \\\text { Cost of goods sold } & - 0 - & 125,000\end{array}$ Which of the following statements is correct?

If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions.

Unreimbursed employment related expenses are classified as deductions for AGI.

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2019: $\begin{array} { l r } \text { Salary from job } & \$ 90,000 \\\text { Alimony received from ex-wife } & 10,000 \\\text { Medical expenses } & 7,000\end{array}$ Based on this information, Sammy has:

Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug-trafficking business do not reduce taxable income.

During the year, Martin rented his vacation home for three months and spent one month there.Gross rental income from the property was $5,000.Martin incurred the following expenses: mortgage interest, $3,000? real estate taxes, $1,500? utilities, $800? maintenance, $500? and depreciation, $4,000.Compute Martin's allowable deductions for the vacation home under the court's approach and the IRS's approach.

Which of the following is incorrect?

For an activity classified as a hobby, the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion) . (2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies) . For tax years before 2018, if these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is:

If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.

Calculate the net income includible in taxable income for the following hobby in 2019: $\begin{array} { l r } \text { Income } & \$ 23,000 \\\text { Mortgage interest and property taxes allocable to hobby } & 12,000 \\\text { Depreciation } & 4,000 \\\text { Supplies and fees } & 7,000 \\\text { Telephone for hobby } & 3,000\end{array}$

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

Priscella pursued a hobby of making bedspreads in her spare time.Her AGI before considering the hobby is $40,000. During 2019 she sold the bedspreads for $10,000.She incurred expenses as follows: $\begin{array} { l r } \text { Supplies } & \$ 4,000 \\\text { Interest on loan to get business started } & 500 \\\text { Advertising } & 6,500\end{array}$ Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related expenses can be deducted.

The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income-producing factor in the business.

Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month.He commenced his practice on February 1, 2019.In order to guarantee no rent increases during an 18-month period, he signed an 18- month lease and prepaid the $90,000 on February 1, 2019.How much can Taylor deduct as rent expense for 2019?

During the year, Jim rented his vacation home for 200 days and lived in it for 19 days.During the remaining days, the vacation home was available for rental use.Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?