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Exam 6: Deductions and Losses: In General

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Question 61

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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.

A) True
B) False

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Question 62

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The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business).

A) True
B) False

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Question 63

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What are the relevant factors to be considered in determining whether an activity is profit-seeking or a hobby?

If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct?

Paula is the sole shareholder of Violet, Inc. For 2018, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2018 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct?

Investment related expenses, such as paying a fee to an investment manager, generally are deductions from adjusted gross income in 2018.

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 is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.

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

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?

Which of the following may be deductible in 2018?

Two-thirds of treble damage payments under the antitrust law are not deductible.

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

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

If a publicly-traded corporation hires a new CEO in 2018 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000.

During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?

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.?

Trade or business expenses of a self-employed taxpayer should be treated as:

During the year, Martin rented his vacation home for three months and spent one month there. Gross rental income from the property was $5,000. Martin incurred the following expenses: mortgage interest, $3,000? real estate taxes, $1,500? utilities, $800? maintenance, $500? and depreciation, $4,000. Compute Martin's allowable deductions for the vacation home under the court's approach and the IRS's approach.

The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of a shareholder-employee's gross income, but results in an increase in the taxable income of the corporation.

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