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Exam 6: Deductions and Losses: in General

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Question 1

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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?

A) If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest part.
B) If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part.
C) If Jeanette pays the mortgage company directly, she cannot deduct the interest part.
D) Only b. and c. are correct.
E) a., b., and c. are correct.

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

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Question 2

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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?

A) If Benita is a cash method taxpayer, she cannot deduct the expense until 2015.
B) If Benita is an accrual method taxpayer, she can deduct the expense in 2014.
C) If Benita uses the accrual method, she can choose to deduct the expense in either 2014 or 2015.
D) Only b. and c. are correct.
E) a., b., and c. are correct.

F) A) and B)
G) A) and C)

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Question 3

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

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, 2014. How much of the $36,000 payment can she deduct in 2014 and 2015? a. If Mella is an accrual basis taxpayer? b. If Mella is a cash basis taxpayer?

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: $\begin{array}{llr} \text { Supplies} &\$4,000\\ \text { Interest on loan to get business started } &500\\ \text { Advertising } &6,500\end{array}$ Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

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.

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.

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

Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: $\begin{array}{llr} \text {General representation in obtaining the divorce } &\$1,500\\ \text { Services in obtaining custody of the child } &900\\ \text { Services in settlement of martial property } &600\\ \text { Determining the tax consequences of: } &\\ \text { Dependency deduction for child} &700\\ \text { Property settlement } &1,300\\\end{array}$ Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is:

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: $\begin{array}{lr}\text { Mortgage interest } & \$ 9,000 \\\text { Real estate taxes } & 3,000 \\\text { Utilities } & 2,000 \\\text { Maintenance } & 1,000 \\\text { Insurance } & 500 \\\text { Depreciation (rental part) } & 4,000\end{array}$ Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft. One negotiation is with a U.S. assistant secretary of defense. She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table. Another negotiation is with the minister of defense of a third world country. To complete the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment. Beige makes the payments and closes the deals. How much of these payments are deductible by Beige, Inc.?

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Janet is the CEO for Silver, Inc., a closely held corporation. Her total compensation for 2014 is $5 million. Of this amount, $2 million is a salary and $3 million is a bonus. The bonus was calculated as 5% of Silver's net income before the bonus and before taxes ($60 million X 5% = $3 million). The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver's performance. It is approved annually by the entire board of directors (1 of the 5 directors is an outside director) of Silver. How much of Janet's compensation can Silver deduct for 2014?

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

While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees, marketing survey, etc.) in exploring its business potential. Her parents have agreed to loan her the money required to start the business. What amount of these investigation costs can Angel deduct if: a. She opens the bookstore on August 1, 2014. b. She decides not to open the bookstore.

Marsha is single, had gross income of $50,000, and incurred the following expenses: $\begin{array}{lr}\text { Charitable contribution } & \$ 2,000 \\\text { Taxes and interest on home } & 7,000 \\\text { Legal fees incurred in a tax dispute } & 1,000 \\\text { Medical expenses } & 3,000 \\\text { Penalty on early withdrawal of savings } & 250\end{array}$ Her AGI is: a. $\$ 39,750$ . b. $\$ 49,750$ . c. $\$ 40,000$ . d. $\$ 39,750$ . e. $\text { None of the ahove }$

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.

Cory incurred and paid the following expenses: $\begin{array}{llr} \text { Tax return preparation fee} &\$600\\ \text { Moving expenses } &2,000\\ \text { Investment expenses} &500\\ \text {Expenses associated with rental property } &1,500\\ \text { Interest expense associated with loan to finance tax-exempt bonds } &400\\\end{array}$ Calculate the amount that Cory can deduct (before any percentage limitations) .

Which of the following may be deductible?