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Exam 6: Deductions and Losses: in General

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Question 31

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None of the prepaid rent paid on September 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 32

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Kitty runs a brothel (illegal under state law) and has the following items of income and expense. What is the amount that she must include in taxable income from her operation? $\begin{array}{lr}\text { Income }&\$200,000\\\text { Expenses: }\\\text { Rent } & 8,000 \\\text { Utilities } & 2,000 \\\text { Bribes to police } & 10,000 \\\text { Office supplies } & 5,000 \\\text { Legal fees } & 20,000 \\\text { Depreciation } & 14,000 \\\text { Illegal kickbacks } & 15,000\end{array}$

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The bribes to polic...

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Question 33

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Trade or business expenses are classified as deductions for AGI. Section 212 expenses, barring certain exceptions, are classified as deductions from AGI. What are these exceptions?

In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?

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?

Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows: $\begin{array}{lr}\text { Alimony(divorce finalized in 2017) } & \$ 20,000 \\\text { Charitable contributions } & 4,000 \\\text { Contribution to a traditional IRA } & 5,500 \\\text { Expenses paid on rental property } & 7,500 \\\text { Interest on home mortgage and property taxes on personal residence } & 7,200 \\\text { State income tax } & 2,200\end{array}$ What is Al's AGI?

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

Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.

Are all personal expenses disallowed as deductions in 2019?

Which of the following is not a "trade or business" expense?

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

Rex, a cash basis calendar year taxpayer, runs a bingo operation that is illegal under state law. During 2019, a bill designated H.R. 9 is introduced into the state legislature, which, if enacted, would legitimize bingo games. In 2019, Rex had the following expenses: $\begin{array}{lr}\text { Operating expenses in conducting bingo games } & \$ 247,000 \\\text { Payoff money to state and local police } & 24,000 \\\text { Newspaper ads supporting H.R. } 9 & 3,000 \\\text { Political contributions to legislators who support HR. 9 } & 8.000\end{array}$ Of these expenditures, Rex may deduct:

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

Alfred's Enterprises, an unincorporated entity, pays employee salaries of $100,000 during the year. At the end of the year, $12,000 of additional salaries have been earned but not paid until the beginning of the next year. a. Determine the amount of the deduction for salaries if Alfred is a cash method taxpayer. b. Determine the amount of the deduction for salaries if Alfred is an accrual method taxpayer.

In what situations may individuals be able to take a qualified business income deduction?

If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related expenses can be deducted.

Which of the following can be claimed as a deduction for AGI?

Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from adjusted gross income (AGI) than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.

Unreimbursed employment related expenses are classified as deductions for AGI.

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.