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Exam 6: Deductions and Losses: in General

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Question 71

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Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To provide Olive with funds to acquire additional working capital, each shareholder lends Olive $100,000 with a 6% interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. Olive pays the $3,000 to each shareholder early next year. From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income?

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Maurice and Alex are related parties wit...

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Question 72

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Bob and April own a house at the beach. The house was rented to unrelated parties for eight weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: $\begin{array}{lll}\text { Gross rental income } & & \$ 4,000 \\\text { Less: Mortgage interest and property taxes } & \$ 3,500 & \\\text { Other allocated expenses } & 2,000 & (5,500) \\\text { Net rental loss }&&(\$1,500) \end{array}$ What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable?

A) A $1,500 loss should be reported.
B) Only the mortgage interest and property taxes should be deducted.
C) Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use.
D) Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted.
E) Bob and April should include none of the rental income or expenses related to the beach house in their current year income tax return.

F) D) and E)
G) A) and E)

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Question 73

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Ralph wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them.

Briefly discuss the disallowance of deductions for capital expenditures.

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:

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Bobby operates a drug-trafficking business. Because he has an accounting background, he keeps detailed financial records. What expenses can Bobby deduct on his Federal income tax return?

The Code does not specifically define what constitutes a trade or business.

An expense need not be recurring in order to be "ordinary."

Tom operates an illegal drug-running operation and incurred the following expenses: $\begin{array} { l r } \text { Salaries } & \$ 75,000 \\\text { Ilegal kickbacks } & 20,000 \\\text { Bribes to border guards } & 25,000 \\\text { Cost of goods sold } & 160,000 \\\text { Rent } & 8,000 \\\text { Interest } & 10,000 \\\text { Insurance on furniture and fixtures } & 6,000 \\\text { Utilities and telephone } & 20,000\end{array}$ Which of the following amounts reduces his taxable income?

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.

Purchased goodwill must be capitalized but can be amortized over a 60-month period.

What is the appropriate tax treatment for expenditures paid by a taxpayer for another's benefit?

Margarita operates a sole proprietorship that earns $100,000 of qualified business income after deducting salaries of $300,000. The sole proprietorship is not a specified service business. She files a single tax return for 2019. Assume her taxable income before the QBI deduction is $175,000. Margarita's QBI deduction for 2019 is:

In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least three out of five years) ensures treatment as a business.

Bruce owns several sole proprietorships. Must he use the same accounting method for each of these businesses?

Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 "grease" payment to a U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan's employer.

A vacation home at the beach that is rented for 200 days and used personally for 16 days is classified in the personal/rental use category.

Legal expenses incurred in connection with rental property are deductions from AGI.

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?