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Exam 6: Deductions and Losses: in General

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Question 31

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Velma and Bud divorced.Velma's attorney fee of $5,000 is allocated as follows: $\begin{array} { l } \text { General representation in obtaining the divorce}&\$1,500\\ \text { Services in obtaining custody of the child }&900\\ \text { Services in settlement of martial property }&600\\ \text { Determining the tax consequences of: }&\\ \text {Dependency deduction for child }&700\\ \text { Property settlement }&1,300\\\end{array}$ Of the $5,000 Velma pays to her attorney,the amount she may deduct as an itemized deduction is:

A) $0.
B) $700.
C) $2,000.
D) $5,000.
E) None of these.

F) None of the above
G) C) and E)

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Question 32

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Tracy invested in the following stocks and bonds during 2014. Blue,Inc.$25,000 City of Falcon bonds 75,000 To finance the investments,she borrowed $100,000 from Swan Bank.Interest expense paid on the loan during 2014 was $5,000.During 2014,Tracy received $1,250 of dividend income from Blue,Inc.and $3,000 of interest income on the municipal bonds. a.Determine the amount of Tracy's gross income. b.Determine the maximum amount of Tracy's deductible interest expense.

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a.Tracy must include the $1,250 of divid...

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Question 33

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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?

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

Bob and April own a house at the beach.The house was rented to unrelated parties for 8 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: $\begin{array} { l } \text { Gross rental income}&&\$4,000\\ \text { Less: Mortgage interest and property taxes}&\$3,500\\ \text { Other allocated expenses}&2,000&(5,500) \\ \text {net rental loss }&&(\$1,500) \\\end{array}$ 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?

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

Payments by a cash basis taxpayer of capital expenditures:

Marsha is single,had gross income of $50,000,and incurred the following expenses: Charitable contribution ^$2,000 Taxes and interest on home ^7,000 Legal fees incurred in a tax dispute ^1,000 Medical expenses ^3,000 Penalty on early withdrawal of savings 250 Her AGI is:

Sandra sold 500 shares of Wren Corporation to Bob,her brother,for its fair market value.She had paid $26,000 for the stock.Calculate Sandra's and Bob's gain or loss under the following circumstances: a.Sandra sold the shares to Bob for $20,000.One year later,Bob sold them for $18,000. b.Sandra sold the shares to Bob for $30,000.One year later,Bob sold them for $27,000. c.Sandra sold the shares to Bob for $20,000.One year later,Bob sold them for $28,000.

Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.

In distinguishing whether an activity is a hobby or a trade or business,discuss the presumptive rule.

Under the "one­year 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.

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

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

During 2013,the first year of operations,Silver,Inc. ,pays salaries of $175,000.At the end of the year,employees have earned salaries of $20,000,which are not paid by Silver until early in 2014.What is the amount of the deduction for salary expense?

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

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

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: $\begin{array} { l } \text {Mortgage interest }&\$9,000\\ \text { Real estate taxes}&3,000\\ \text {Utilities }&2,000\\ \text { Maintenance}&1,000\\ \text {Insurance }&500\\ \text {Depreciation (rental part) }&4,000\\\end{array}$ Using the IRS approach,total expenses that Robyn can deduct on her tax return associated with the beach house are:

Graham,a CPA,has submitted a proposal to do the annual audit for a municipality.Owen,the city treasurer,tells Graham that for a $1,000 fee,he will use his influence to have the audit awarded to Graham.What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?