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Exam 6: Deductions and Losses: in General

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Question 31

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Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2017: ​ Based on this information, Sammy has:

A) AGI of $90,000.
B) AGI of $95,000.
C) AGI of $99,500.
D) Deduction for medical expenses of $0.
E) None of the above.

F) A) and D)
G) C) and E)

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Question 32

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

A) True
B) False

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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?

Which of the following is not deductible?

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.

Are all personal expenses disallowed as deductions?

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.

Discuss the application of the "one-year rule" on prepayments by a cash basis taxpayer.

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Which of the following is correct?

Under the "one-year 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.

If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2017, 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:

Walt wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them.

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?

Marvin spends the following amounts on a house he owns: ​ a.How much of these expenses can Marvin deduct if the house is his principal residence? b.How much of these expenses can Marvin deduct if he rents the house to a tenant? c.Classify any deductible expenses as deductions for AGI or as deductions from AGI.

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?

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?

The stock of Eagle, Inc. is owned as follows: Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate Tom's realized and recognized loss associated with the sale.

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2017, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2017, Rex had the following expenses: Of these expenditures, Rex may deduct: