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Exam 5: Business Deductions

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Question 41

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Discuss the difference between the half-year convention and the mid-quarter convention.

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The half-year convention assumes propert...

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Question 42

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Albie operates an illegal drug-running business and has the following items of income and expense. What is Albie's adjusted gross income from this operation?

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Albie is allowed to reduce his AGI only ...

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Question 43

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Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

On July 15, 2016, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the maximum total cost recovery from the improvements in 2016.

Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?

Pat purchased a used five-year class asset on March 15, 2016, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2016 for earnings and profits purposes.

Audra acquires the following new five-year class property in 2016: Audra elects § 179 treatment for Asset C. Audra's taxable income from her business would not create a limitation for purposes of the § 179 deduction. Audra claims the full available additional first-year depreciation deduction. Determine her total cost recovery deduction (including the § 179 deduction) for the year.

On March 3, 2016, Sally purchased and placed in service a building costing $12,000,000. The building has 10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000. Determine Sally's cost recovery for the building in 2016.

The luxury auto cost recovery limits applies to all automobiles.

If a taxpayer operates an illegal business, no deductions are permitted.

On June 1, 2016, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation (if available) . Determine the cost recovery deduction for 2017.

Petula's business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2016, heat pump sales are $400,000. Actual warranty expenses paid in 2016 are $40,000. a.​Determine the amount of the warranty expense deduction for 2016 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 which covered the second and third years of ownership?

Are there any circumstances under which lobbying expenditures are deductible?

Bonnie purchased a new business asset (five-year property) on March 10, 2016, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2016, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2016 for these assets.

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

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

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 loan 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, 2016. b.She decides not to open the bookstore.

For real property, the ADS convention is the mid-month convention.

Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on February 2, 2016. Determine the cost recovery deduction for the year of the sale.