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Exam 6: Deductions and Losses: in General

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Question 41

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None of the prepaid rent paid on November 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.

A) True
B) False

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Question 42

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If a taxpayer cannot satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity cannot be deducted in excess of the gross income from the activity.

A) True
B) False

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Question 43

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Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000.Beulah converts the property to rental use on November 1, 2012.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.

If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.

If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.

Alfred's Enterprises, an unincorporated entity, pays employee salaries of $92,000 during the year. At the end of the year, $9,000 of additional salaries have been earned but not paid until the beginning of the next year.

Gladys owns a retail hardware store in Tangipahoa.She is considering opening a business in Hammond, a community located 25 miles away.She incurs expenses of $60,000 in 2012 in investigating the feasibility and desirability of doing so.What amount can Gladys deduct in 2012 if the business is:

Mitch is in the 28% 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 $1,000 expenditure that is classified as a deduction 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: Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

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 order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18-month lease for $36,000.The lease commences on October 1, 2012. How much of the $36,000 payment can she deduct in 2012 and 2013?

Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers.The corporation uses the accrual method of accounting and the shareholders use the cash method.To provide Olive with funds to acquire additional working capital, the shareholders each loan Olive $100,000 with a 6% interest rate.At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder.From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

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

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.

All domestic bribes (i.e., to a U.S.official) are disallowed as deductions.

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

If part of a shareholder/employee's salary is classified as unreasonable, determine the effect on the:

Paula is the sole shareholder of Violet, Inc.For 2012, she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2012 is $500,000.On audit, the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?

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.

The cost of legal advice associated with the preparation of an individual's Federal income tax return is not deductible because it is a personal expense.