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Exam 6: Deductions and Losses: in General

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Question 51

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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 this year. 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.

A) True
B) False

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Question 52

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Only some employment related expenses are classified as deductions for AGI.

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B) False

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Question 53

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Deductions are allowed unless a specific provision in the tax law provides otherwise.

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

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?

For a vacation home to be classified in the personal/rental use category, what attributes must be present?

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, 2017. How much of the $36,000 payment can she deduct in 2017 and 2018? a.If Mella is an accrual basis taxpayer? b.If Mella is a cash basis taxpayer?

Bridgett's son, Clyde, is $12,000 in arrears on his residential mortgage payments. Of the $12,000, $7,500 represents interest and $4,500 represents principal. a.If Bridgett pays the $12,000 to the lender, how much can she deduct? How much can Clyde deduct? b.If Bridgett pays the $7,500 of interest to the lender and loans or gives $4,500 to Clyde, who pays the $4,500 of principal, how much can Bridgett deduct? How much can Clyde deduct? c.If Bridgett gives or lends the $12,000 to Clyde who pays the lender, how much can he deduct? How much can Bridgett deduct? d.Advise Bridgett and Clyde on how the payment should be made.

Under what circumstance can a bribe be deducted?

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.

Paula is the sole shareholder of Violet, Inc. For 2017, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2017 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct?

Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during the year: ​ Calculate Austin's deductions for AGI.

Are there any exceptions to the rule that personal expenditures cannot be deducted?

Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: ​ What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable?

Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if: a.She opens a new shop in Vero Beach. b.She decides not to open a new shop in Vero Beach.

Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees for their respective attorneys with the expenses being itemized as follows: ​ Although there is no requirement that he do so, Elmer pays Mattie's lawyer as a gesture of the positive feelings he still has for her. a.Determine the deductions for Mattie and for Elmer. b.Classify the deductions as for AGI and from AGI.

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?

Petula's business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2017, heat pump sales are $400,000. Actual warranty expenses paid in 2017 are $40,000. a.Determine the amount of the warranty expense deduction for 2017 if Petula's business uses the accrual method. b.How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties which covered the second and third years of ownership?

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

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 can be deducted if the taxpayer itemizes deductions.