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Exam 6: Deductions and Losses: in General

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Question 21

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If a taxpayer operates an illegal business, no deductions are permitted.

A) True
B) False

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Question 22

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Tom operates an illegal drug-running operation and incurred the following expenses: $\begin{array}{lr}\text { Salaries } & \$ 75,000 \\\text { Illegal kickbacks } & 20,000 \\\text { Bribes to border guards } & 25,000 \\\text { Cost of goods sold } & 160,000 \\\text { Rent } & 8,000 \\\text { Interest } & 10,000 \\\text { Insurance on furniture and fixtures } & 6,000 \\\text { Utilities and telephone } & 20,000\end{array}$ Which of the above amounts reduces his taxable income? A) $\$ 0$ B) $\$ 160,000$ . C) $\$ 279,000$ . D) $\$324,000$ . E)None of the ahove

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Question 23

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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.

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.

Sandra owns an insurance agency. The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. $\begin{array}{lr}\text { Revenue } & \$ 250,000 \\\text { Salaries and commissions } & 100,000 \\\text { Rent } & 10,000 \\\text { Insurance } & 5,000 \\\text { Utilities } & 6,000 \\\text { Accounts receivable, } 1 / 1 / 2014 & 40,000 \\\text { Accounts receivable, } 12 / 31 / 2014 & 38,000 \\\text { Accounts payable, } 1 / 1 / 2014 & 12,000 \\\text { Accounts payable, } 12 / 31 / 2014 & 11,000\end{array}$ Calculate Sandra's net profit using the cash method for 2014.

If part of a shareholder/employee's salary is classified as unreasonable, determine the effect on the: a. Shareholder/employee's gross income. b. Corporation's taxable income.

Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge).

Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0. Based on this policy, Robin and Jeff each receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.

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.

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

Which of the following are deductions for AGI?

Trade and business expenses should be treated as:

Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct these political contributions?

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?

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

Which of the following is not a "trade or 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. $\begin{array}{lr}\text { Credit sales } & \$ 400,000 \\\text { Collections on credit sales } & 250,000 \\\text { Amount added to the reserve } & 10,000 \\\text { Beginning balance in the reserve } & -0- \\\text { Identifiable bad debts during } 2014 & 12,000\end{array}$ The amount of the deduction for bad debt expense for Petal for 2014 is:

Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.

Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during the year: $\begin{array}{lr}\text { Medical expenses } & \$ 5,000 \\\text { Alimony } & 24,000 \\\text { Charitable contributions } & 2,000 \\\text { Casualty loss (after } \$ 100 \text { floor) } & 1,000 \\\text { Mortgage interest on personal } & 4,500 \\\text { Property taxes on personal residence } & 4,200 \\\text { Moving expenses } & 2,500 \\\text { Contribution to a traditional IRA } & 4,000 \\\text { Sales taxes (no state or local income } & \\\quad \text { tax is imposed) } & 1,300\end{array}$ Calculate Austin's deductions for AGI.

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