Taxation in the United States and Deduction
Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI. True False 4. All employment related expenses are classified as deductions for AGI. True False 5. The only § 212 expenses that are deductions for AGI are those related to rent and royalty income. True False 6. Alice incurs qualified moving expenses of $12,000. If she is reimbursed by her employer, the deduction is classified as a deduction for AGI. If not reimbursed, the deduction is classified as an itemized deduction. True False 7.
Expenses incurred for the production or collection of income generally are deductions from adjusted gross income. True False 8. The Code defines what constitutes a trade or business. True False 9. For an expense to be deducted as ordinary, it must be recurring in nature. True False 10. Amos, a shareholder-employee of Pigeon, Inc. , receives a $400,000 salary. The IRS classifies $125,000 of this amount as unreasonable compensation. The effect of this reclassification is to decrease Amos’ gross income by $125,000 and increase Pigeon’s gross income by $125,000. True False 11.
A salary that is classified as unreasonable by the IRS is disallowed as a deduction to the corporation. True False 12. 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. True False 13. Under no circumstance can a loss on the sale of a personal use asset be deducted. True False 14. The income of a sole proprietorship are reported on Schedule C (Profit or Loss from Business). True False 15. The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.
True False 16. Because it has only one owner, any sole proprietorship is permitted to elect the cash method of accounting. True False 17. A cash basis taxpayer who charges an expense on a bank credit card is allowed to claim a deduction currently, whereas a cash basis taxpayer who charges an expense on a department store credit card is not allowed to claim a deduction until payment is made. True False 18. 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.
True False 19. 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. True False 20. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests. True False 21. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer. True False 22. All domestic bribes (i. e. , to a U. S. fficial) are disallowed as deductions. True False 23. Fines and penalties paid for violations of the law (e. g. , illegal dumping of hazardous waste) are deductible only if they relate to a trade or business. True False 24. Susan is a sales representative for a U. S. weapons manufacturer.
She makes a $100,000 “grease” payment to a U. S. government official associated with a weapons purchase by the U. S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan’s employer. True False 5. 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. True False 26. Two-thirds of treble damage payments under the antitrust law are deductible. True False 27. The legal cost of having a will prepared is not deductible. True False 28. Legal expenses incurred in connection with rental property are deductions from AGI. True False 29. Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.
True False 30. The ordinary and necessary expenses for operating an illegal gambling operation (excluding such items as fines, bribes, and other illegal payments) are deductible. True False 31. Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income. True False 32. A political contribution to the Democratic Party or the Republican Party is not deductible, but a contribution to the Presidential Election Campaign Fund is deductible. True False 33.
A football team that pays a star player an annual salary of $20 million can deduct the entire $20 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible. True False 34. The expenses incurred to investigate the expansion of an existing business are deductible even if the expansion is not accomplished. True False 35. 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. True False 36.
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. True False 37. 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. True False 38. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183. True False 39.
A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed. True False 40. If an item such as property taxes and home mortgage interest exceed the income from a hobby, the excess amount of this item over the hobby income cannot be deducted if the taxpayer itemizes deductions. True False 41. Hobby activity expenses are deductible from AGI to the extent of hobby income. Such expenses not in excess of hobby income are not subject to the 2% of AGI floor. True False 42. Martha rents part of her personal residence in the summer for 3 weeks for $3,000.
Anne rents all of her personal residence for one week in December for $2,500. Anne must include the $2,500 in her gross income whereas Martha is not required to include the $3,000 in her gross income. True False 43. 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. True False 44. If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed. True False 45. If a vacation home is classified as primarily personal use (i. . , rented for fewer than 15 days), none of the related expenses can be deducted. True False 46. The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction. True False 47. 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. True False 48. A vacation home at the beach which is rented for 170 days and used personally for 16 days is classified in the personal/rental use category. True False 49.
If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction. True False 50. 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. True False 51. Ralph wants to give his daughter $1,000 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence.
If Ralph pays the property taxes, he cannot deduct them. True False 52. 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. True False 53. Landscaping expenditures on new rental property are deductible in the year they are paid or incurred. True False 54. Marge sells land to her adult son, Jason, for its $20,000 appraised value.