TAX 4001 - Chapter 6

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, 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:

Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?

Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:

Alimony ...................................................................................$20,000
Charitable contributions ................................................................4,000
Contribution to a traditional IRA .....................................................5,500
Expenses paid on rental property ...................................................7,500
Interest on home mortgage and property taxes on personal residence 7,200
State income tax ..........................................................................2,200

What is Al’s AGI?

Which of the following legal expenses are deductible for AGI?

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:

Mortgage interest .......................................................................$9,000
Real estate taxes .........................................................................3,000
Utilities .......................................................................................2,000
Maintenance ................................................................................1,000
Insurance ......................................................................................500
Depreciation (rental part) ..............................................................4,000

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

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

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

Which of the following may be deductible?

Which of the following is not deductible?

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

Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct?

Which of the following is incorrect?

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

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

Which of the following is not a related party for constructive ownership purposes under § 267?

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:

Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct?

Melba incurred the following expenses for her dependent daughter during the current year:

Payment of principal on daughter’s automobile loan ........................$3,600
Payment of interest on above loan ..................................................2,900
Payment of daughter’s property taxes .............................................1,800
Payment of principal on daughter’s personal residence loan ...............2,800
Payment of interest on daughter’s personal residence loan ................7,000

How much may Melba deduct in computing her itemized deductions?

Velma and Bud divorced. Velma’s attorney fee of $5,000 is allocated as follows:

General representation in obtaining the divorce ..............................$1,500
Services in obtaining custody of the child ...........................................900
Services in settlement of martial property ..........................................600
Determining the tax consequences of: Dependency deduction for child ..700
Property settlement ......................................................................1,300

Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is:

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2014, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2014, Rex had the following expenses:

Operating expenses in conducting bingo games ..........................$247,000
Payoff money to state and local police ...........................................24,000
Newspaper ads supporting H.R. 9 ...................................................3,000
Political contributions to legislators who support H.R. 9 .....................8,000

If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct?

Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct?

Cory incurred and paid the following expenses:

Tax return preparation fee ..............................................................$600
Moving expenses .........................................................................2,000
Investment expenses ......................................................................500
Expenses associated with rental property ........................................1,500
Interest expense associated with loan to finance tax-exempt bonds .......400

Calculate the amount that Cory can deduct (before any percentage limitations).

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:

Gross rental income ....................................................................$4,000
Less: Mortgage interest and property taxes ..............$3,500
Other allocated expenses .........................................2,000...........(5,500)
Net rental loss .........................................................................($1,500)

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?

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:

In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?

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

Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2014, the following occur associated with bad debts.

Credit sales ............................................................................$400,000
Collections on credit sales ..........................................................250,000
Amount added to the reserve .......................................................10,000
Beginning balance in the reserve ......................................................–0–
Identifiable bad debts during 2014 ...............................................12,000

The amount of the deduction for bad debt expense for Petal for 2014 is:

Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:

Supplies ....................................................................................$4,000
Interest on loan to get business started .............................................500
Advertising ..................................................................................6,500

Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

Trade and business expenses should be treated as:

Which of the following is a deduction for AGI (itemized deduction)?

Which of the following is correct?

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?

Tom operates an illegal drug-running operation and incurred the following expenses:

Salaries ...................................................................................$75,000
Illegal kickbacks .........................................................................20,000
Bribes to border guards ...............................................................25,000
Cost of goods sold ....................................................................160,000
Rent ...........................................................................................8,000
Interest ....................................................................................10,000
Insurance on furniture and fixtures .................................................6,000
Utilities and telephone ................................................................20,000

Which of the above amounts reduces his taxable income?

Andrew, who operates a laundry business, incurred the following expenses during the year.

· Parking ticket of $250 for one of his delivery vans that parked illegally.
· Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
· DUI ticket of $500 while returning from the rock concert.
· Attorney’s fee of $600 associated with the DUI ticket.

What amount can Andrew deduct for these expenses?

Which of the following are deductions for AGI?

Payments by a cash basis taxpayer of capital expenditures:

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
..................................................................Terry................Jim
Employee salaries .......................................$200,000 $200,000
Bribes to police ..............................................25,000 25,000
Rent and utilities ............................................50,000 50,000
Cost of goods sold ..............................................–0– 125,000

Which of the following statements is correct?

Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:

Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions:

Salary from job ........................................................................$90,000
Alimony received from ex-wife .....................................................10,000
Medical expenses .........................................................................8,000

Based on this information, Sammy has:

On January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.

Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014?

Paula is the sole shareholder of Violet, Inc. For 2014, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet’s taxable income for 2014 is $500,000. On audit, the IRS treats $100,000 of Paula’s salary as unreasonable. Which of the following statements is correct?

Which of the following must be capitalized by a business?