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Exam 6: Deductions and Losses: in General

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Question 51

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

A) True
B) False

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Question 52

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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.

A) True
B) False

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Question 53

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If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.

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

Mitch is in the 24% tax bracket.He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from adjusted gross income (AGI) than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

Bridgett's son, Clyde, is $12,000 in arrears on his residential mortgage payments.Of the $12,000, $7,500 represents interest and $4,500 represents principal. a.If Bridgett pays the $12,000 to the lender, how much can she deduct? How much can Clyde deduct? b.If Bridgett pays the $7,500 of interest to the lender and lends or gives $4,500 to Clyde, who pays the $4,500 of principal, how much can Bridgett deduct? How much can Clyde deduct? c.If Bridgett gives or lends the $12,000 to Clyde who pays the lender, how much can he deduct? How much can Bridgett deduct? d.Advise Bridgett and Clyde on how the payment should be made.

Under the 12-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.

LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building.The gross receipts of the partnership are less than $100,000.LD must capitalize the $50,000 paid for the land but can deduct the $150,000 paid for the building in the current tax year.

Which of the following is not a "trade or business" expense?

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.

If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense.

If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.

Petula's business sells heat pumps that have a one-year warranty.Based on historical data, the warranty costs amount to 11% of sales.During 2019, heat pump sales are $400,000.Actual warranty expenses paid in 2019 are $40,000. a.Determine the amount of the warranty expense deduction for 2019 if Petula's business uses the accrual method. b.How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties that covered the second and third years of ownership?

Arnold and Beth file a joint return in 2019.Use the following data to calculate their deduction for AGI. $\begin{array} { l r } \text { Mortgage interest on personal residence } & \$ 6,000 \\\text { Property taxes on personal residence } & 2,500 \\\text { Alimony payments (divorce finalized in 2014) } & 12,000 \\\text { Moving expenses } & 7,000 \\\text { Charitable contributions } & 1,500 \\\text { State income taxes } & 5,000 \\\text { Investment interest (\$8,000 of expenses limited to net investment income of } \$ 7,500 ) & 7,500 \\\text { Unreimbursed employee expenses } & 2,500 \\\text { Sales taxes } & 2,600\end{array}$

Sandra owns an insurance agency.The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. $\begin{array} { l r } \text { Revenue } & \$ 250,000 \\\text { Salaries and commissions } & 100,000 \\\text { Rent } & 10,000 \\\text { Insurance } & 5,000 \\\text { Utilities } & 6,000 \\\text { Accounts receivable, 1/1/2019 } & 40,000 \\\text { Accounts receivable, 12/31/2019 } & 38,000 \\\text { Accounts payable, 1/1/2019 } & 12,000 \\\text { Accounts payable, 12/31/2019 } & 11,000 \\\text { Calculate Sandra's net profit using the cash method for } 2019 &\end{array}$

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.

Janet is the CEO for Silver, Inc., a closely held corporation.Her total compensation for 2019 is $5 million.Of this amount, $2 million is a salary and $3 million is a bonus.The bonus was calculated as 5% of Silver's net income of $60 million before the bonus and before taxes ($60 million × 5% = $3 million).The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver's performance.It is approved annually by the entire board of directors (one of the five directors is an outside director) of Silver.How much of Janet's compensation can Silver deduct for 2019?

Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business.

Which of the following can be claimed as a deduction for AGI?

Which of the following are deductions for AGI?