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Exam 6: Deductions and Losses: in General

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Question 41

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Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2018, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should:

A) Capitalize $14,000 and not deduct $9,000.
B) Expense $23,000 for 2018.
C) Expense $9,000 for 2018 and capitalize $14,000.
D) Capitalize $23,000.
E) None of the above.

F) C) and D)
G) A) and D)

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Question 42

Multiple Choice

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Melba incurred the following expenses for her dependent daughter during the current year: $\begin{array}{lr} \text { Payment of principal on daughter's automobile loan} &\$ 3,600 \\ \text {Payment of interest on above loan } &2,900 \\ \text { Payment of daughter's property taxes } &1,800 \\ \text {Payment of principal on daughter's personal residence loan } &2,800 \\ \text { Payment of interest on daughter's personal residence loan } &7,000\end{array}$ How much may Melba deduct in computing her itemized deductions?

A) $\$ 0$ .
B) $\$ 8,800$
C) $\$ 11,700$ .
D) $\$ 18,100$
E) None of the above.

F) C) and D)
G) B) and C)

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Question 43

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If a publicly-traded corporation hires a new CEO in 2018 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000.

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, the shareholders each loan 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. From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

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

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.

Can a trade or business expense be deductible if it is necessary but not ordinary?

Which of the following may be deductible in 2018?

Which of the following statements is correct in connection with the investigation of a business?

In what situations may individuals be able to take a qualified business income deduction?

In 2018, unreimbursed employment related expenses are classified as deductions for AGI.

Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.

Payments by a cash basis taxpayer of capital expenditures:

Under the "twelve month rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

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

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Are all personal expenses disallowed as deductions in 2018?

Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: $\begin{array} { l r } \text { Mortgage interest } & \$ 9,000 \\\text { Real estate taxes } & 3,000 \\\text { Utilities } & 2,000 \\\text { Maintenance } & 1,000 \\\text { Insurance } & 500 \\\text { Depreciation (rental part) } & 4,000\end{array}$ Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

The cost of legal advice associated with the preparation of an individual's Federal income tax return that is paid in 2018 is not deductible because it is a personal expense.

Which of the following is a required test for the deduction of a business expense?