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Exam 6: Deductions and Losses: In General

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Question 51

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During 2017, 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 2018. What is the amount of the deduction for salary expense?

A) If Silver uses the cash method, $175,000 in 2017 and $0 in 2018.
B) If Silver uses the cash method, $0 in 2017 and $195,000 in 2018.
C) If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018.
D) If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018.
E) None of the above is correct.

F) C) and E)
G) B) and C)

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Question 52

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Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during 2018: Calculate Austin's deductions for AGI.

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Only the following expenses ar...

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Question 53

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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: Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

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

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:

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 residence is used primarily for personal use (rented for fewer than 15 days per year) , which of the following is correct?

If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions.

Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.

For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party.

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 AGI than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1) the business is not acquired? and (2) the business is acquired?

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 3 out of 5 years) ensures treatment as a business.

In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered?

Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees in 2018 for their respective attorneys with the expenses being itemized as follows: Although there is no requirement that he do so, Elmer pays Mattie's lawyer as a gesture of the positive feelings he still has for her. Determine the deductions for Mattie and for Elmer.

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Which of the following statements is correct?

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Arnold and Beth file a joint return in 2018. Use the following data to calculate their deduction for AGI.

For a president of a publicly held corporation hired in 2018, which of the following are not subject to the $1 million limit on executive compensation?