TAX 3300 Chapter 6 T/F & MC

Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2000 expenditure that is classified as a deduction *from* AGI than if it was *for* AGI

TRUE:

the deduction *from* AGI may be less than the deduction *for* AGI

investment related expenses, such as paying a fee to an investment manager, generally are deductions from AGI in 2018

false

these exp are misc itemized subj to 2% AGI floor which is no longer dedcutible in 2018

Alice incurs qualified moving exp of $12,000 in 2018. If she is not reimbursed by her employer, the deduction is classified as a deduction *for* AGI

false

moving exp no longer deductible for 2018

in 2018, unreimbursed employment related exp are classified as deduction for AGI

false

unreimbursed employee exp are misc itemized deductions subject to 2% AGI floor and thats no longer deductible

section 212 exp that are related to rent and royalty income are deductions for AGI

t

7. The Code does not specifically define what constitutes a trade or business

t

8. An expense need not be recurring in order to be "ordinary

true

12. Only under limited circumstances can a loss on the sale of a personal use asset be deducted

F

under no circumstances can loss of a personal use asset be deducted

14. Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI.

f

such exp are deductble *for* AGI

15. The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income producing factor in the business

f

accrual method must be used in these cases

20. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests

t

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

t

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

f

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

f

payment to saudi official can be deductible unless it is illegal

25. The cost of legal advice associated with the preparation of an individual's Federal income tax return that is paid in 2018 is not deductible because it is a personal expense

t

27. The legal cost of having a will prepared is not deductible.

t

personal expense

28. Legal expenses incurred in connection with rental property are deductions from AGI

f

legal fees are personal expenses so they are not deductible

29. Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business

f

they are deductible in this circumstance

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

f

usual exp for operating an illegal business *are deductible*

but section 162 disallows a deduction for fines, bribes, kicbacks and other illegal payments

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

t

COGS is part of GI calc and is not considered in exp

32. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S.
citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible, while that by Jacques is not

f

deductions not permitted for poltical contributions

so both are non-deductible

34. For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business

f

the cost of investigating a business in the same field *is deductible* regardless if its not acquired

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

t

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

f

this just shifts the burden of proof to the IRS. the possibility of the IRS proving its a hobby still exists

37. 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

f

this just shifts the burden of proof from the taxpayer to the IRS

38. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183

t

39. A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby related expenses.

t

40. If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions

f

property taxes and home mortagage interest *can* be deducted if the taxpayer itemizes deductions

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 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

t

has to exceed 14 days, so Martha is required to include since she rented for 3 weeks and Anne doesnt include because she rented for one week

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

t

this is primarily personal use

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

f

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

f

personal use portion must be allocated as well

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

t

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

f

none can be deducted because they relate to personal use

48. A vacation home at the beach which is rented for 200 days and used personally for 16 days is classified in the personal/rental use category

f

classifed as primarily *rental use* not personal/rental


because it is allowed 20*[200x10%]* days of personal

and it was used for 16 days of personal

49. If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction

f

the maintenance and utility exp allocated to rental days *can be deducted* to GI ceiling

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 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

f

not enough information to determine

54. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge)

f

marge's recog loss is $0

jason's adj basis is $20,000

57. Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2018:
Salary from job $90,000
Alimony received from ex-wife 10,000
Medical expenses 7,000

Based on this information, Sammy has:

a. AGI of $90,000.
b. AGI of $95,000.
c. AGI of $99,500.
d. Deduction for medical expenses of $0.
e. None of the above

D ;

salary from job: 90
alimoney from ex: 10
*AGI=100*

7-[7.5%(100)]

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


a. Deductible for AGI on Schedule E.

b. A deduction from AGI.

c. Deductible for AGI on Schedule C.

d. An itemized deduction if not reimbursed.

e. None of the above.

c

59. Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:

Alimony $20,000
Charitable contributions
4,000
Contribution to a traditional IRA
5,500
Expenses paid on rental property
7,500
Interest on home mortgage and property taxes on personal residence 7,200

State income tax 2,200


What is Al's AGI?
a. $94,100.
b. $103,000.
c. $107,000.
d. $127,000.
e. None of the above.

C

GI=140
Deductions *for* AGI
Alimoney 20
IRA 5.5
exp on rental prop 7.5

*AGI=107*

60. Marsha is single, had gross income of $50,000, and incurred the following expenses:

Charitable contribution
$2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax dispute
1,000
Medical expenses
3,000
Penalty on early withdrawal of savings
250

Her AGI is:
a. $39,750.
b. $49,750.
c. $40,000.
d. $39,750.
e. None of the above.

b

GI: 50
deductions *for* AGI
penalty on early withdrawl .25

AGI= 49.75

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

a. Personal casualty losses.

b. Investment interest
expenses.

c. Medical expenses.

d. Property taxes on personal use real estate.

e. None of the above.

e

all these exp are classified as itemized deductions

62. Which of the following is a deduction for AGI?
a. Contribution to a traditional IRA.
b. Roof repairs to a personal use home.
c. Safe deposit box rental fee in which stock certificates are stored.
d. Property tax on personal residence.
e. All of the above

*a*

c and d are below the line

b is not deductible

63. Which of the following is correct?

a. A personal casualty loss incurred from a Presidentially declared disaster is classified as a deduction from AGI.

b. Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.

c. An expense associated with rental property is classified as a deduction for AGI.

d. Only a. and b. are correct.

e. a., b., and c., are correct.

e

64. Which of the following are deductions for AGI?

a. Mortgage interest on a personal residence.

b. Property taxes on a personal residence.

c. Mortgage interest on a building used in a business.

d. Fines and penalties incurred in a trade or business.

e. None of the above.

c

65. Which of the following is incorrect?

a. Alimony is a deduction for AGI.

b. The expenses associated with royalty property are a deduction from AGI.

c. Contributions to a traditional IRA are a deduction for AGI.

d. Property taxes on taxpayer's personal residence are a deduction from AGI

e. All of the above are correct

b

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

a. Interest on business indebtedness.

b. Property taxes on business property.

c. Parking ticket paid on business auto.

d. Depreciation on business property.

e. All of the above are "trade or business" expenses

c

67. Which of the following is a required test for the deduction of a business expense?

a. Ordinary

b. Necessary

c. Reasonable

d. All of the above

e. None of the above

d

69. During 2017, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2018. What is the amount of the deduction for salary expense?

a. If Silver uses the cash method, $175,000 in 2017 and $0 in 2018.

b. If Silver uses the cash method, $0 in 2017 and $195,000 in 2018.

c. If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018.

d. If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018.

e. None of the above is correct.

d; If Silver uses the *accrual method*, $195,000 in 2017 and $0 in 2018.

70. Benita incurred a business expense on December 10, 2018, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2019. Which of the following is correct?

a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2019.

b. If Benita is an accrual method taxpayer, she can deduct the expense in 2018.

c. If Benita uses the accrual method, she can choose to deduct the expense in either 2018 or 2019.

d. Only b. and c. are correct.

e. a., b., and c. are correct.

b

71. Payments by a cash basis taxpayer of capital expenditures:


a. Must be expensed at the time of payment.

b. Must be expensed by the end of the first year after the asset is acquired.

c. Must be deducted over the actual or statutory life of the asset.

d. Can be deducted in the year the taxpayer chooses.

e. None of the above

c

73. Which of the following legal expenses are deductible for AGI in 2018?

a. Incurred in connection with a trade or business.

b. Incurred in connection with rental or royalty property held for the production of income.

c. Incurred for tax advice relative to the preparation of an individual's income tax return.

d. Only a. and b. qualify.

e. a., b., and c. qualify.

d

74. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2018, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2018, Rex had the following expenses:

Operating expenses in conducting bingo games $247,000

Payoff money to state and local police
24,000
Newspaper ads supporting H.R.
3,000
Political contributions to legislators who support H.R. 8,000

Of these expenditures, Rex may deduct:
a. $247,000.
b. $250,000.
c. $258,000.
d. $282,000.
e. None of the above.

a ; just the operating exp in conducting the bingo games

75. Andrew, who operates a laundry business, incurred the following expenses during the year.

Parking ticket of $250 for one of his delivery vans that parked illegally.
Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
DUI ticket of $500 while returning from the rock concert.
Attorney's fee of $600 is associated with the DUI ticket.

What amount can Andrew deduct for these expenses?
a. $0.
b. $250.
c. $600.
d. $1,425
e. none of the above

a

parking ticket, DUI and attorney fee are all personal and the 250 parking ticket not deductible because violation of public policy

76. Which of the following may be deductible in 2018?

a. Bribes that relate to a U.S. business.

b. Fines paid for violations of the law.

c. Interest on a loan used in a hobby.

d. All of the above.

e. None of the above.

e

77. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses.

b. *Terry* should report profit from his business of $250,000

78. Tom operates an illegal drug-running operation and incurred the following expenses:

Salaries $ 75,000
Illegal kickbacks 20,000
Bribes to border guards 25,000
Cost of goods sold 160,000
Rent 8,000
Interest 10,000
Insurance on furniture and fixtures 6,000
Utilities and telephone 20,000


Which of the above amounts
reduces his taxable income?
a. $0.
b. $160,000.
c. $279,000.
d. $324,000.
e. none of the above

b

COGS would be a decrease of 160K

All other deductions are disallowed

80. Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:

a. A deduction for AGI.

b. A deduction from AGI, subject to the 2 percent floor.

c. A deduction from AGI, not subject to the 2 percent floor.

d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.

e. Not deductible

e

Tommy is not in the same business or similar *and* did not acquire the new business

81. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2018, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should:


a. Capitalize $14,000 and not deduct $9,000.

b. Expense $23,000 for 2018.

c. Expense $9,000 for 2018 and capitalize $14,000.


d. Capitalize $23,000.

e. None of the above

b

Since iris owns and operated TV outlets, all investigation exp can be deducted

82. Which of the following statements is correct in connection with the investigation of a business?

a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned.

b. Expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired.

c. That business must be related to the taxpayer's present business for any expense ever to be deductible.

d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized.

e. None of the above.

b

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

a. Whether the activity is enjoyed by the taxpayer.

b. The expertise of the taxpayers or their advisers.

c. The time and effort expended.

d. The relationship of profits earned and losses incurred.

e. All of the above are relevant factors.

e

84. For an activity classified as a hobby, the expenses are categorized as follows:


(1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had beenengaged in for profit (e.g., depreciation, amortization, and depletion).


(2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxesand home mortgage interest.


(3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if thoseamounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies).


For tax years before 2018, if these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is:

:a. (1), (2), (3).
b. (1), (3), (2).
c. (2), (3), (1).
d. (2), (1), (3).
e. (3), (2), (1).

c ;(2), (3), (1).

85. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During 2018 she sold the bedspreads for $10,000.

She incurred expenses as follows:
Supplies
$4,000
Interest on loan to get business started
500
Advertising
6,500

Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

a. Include $10,000 in income and deduct $11,000 for AGI.

b. Ignore both income and expenses since hobby losses are disallowed.

c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions.

d. Include $10,000 in income and deduct nothing.

e. None of the above.

d

86. Cory incurred and paid the following expenses in 2018:

Tax return preparation fee 600

Moving expenses
2,000

Investment expenses
500

Expenses associated with rental property
1,500

Interest expense associated with loan to finance tax-exempt bonds
400

Calculate the amount that Cory can deduct (before any percentage limitations).
a. $5,000.
b. $4,600.
c. $3,000.
d. $1,500.
e. None of the above

d

only rental property exp are deductible

87. Which of the following is not deductible in 2018?

a. Moving expenses in excess of reimbursement.

b. Tax return preparation fees of an individual.

c. Expenses incurred associated with investments in stocks and bonds.

d. Allowable hobby expenses in excess of hobby income.

e. All of the above.

e

88. If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct?

a. No income is included in AGI.

b. No expenses are deductible.

c. Expenses must be allocated
between rental and personal use.

d. Only a. and b. are correct.

e. a., b., and c. are correct

a

89. 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:

Mortgage interest $9,000
Real estate taxes 3,000
Utilities 2,000
Maintenance 1,000
Insurance 500
Depreciation (rental part)
4,000

Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

a. $0.
b. $6,000.
c. $8,000.
d. $12,000

D

Only mortgage interest and real estate taxes can be deducted

9+3=12

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

a. All rental income is included in gross income.

b. All rental related expenses that are deductible are classified as deductions from AGI.


c. Expenses must be allocated between rental and personal use.

d. Only a. and c. are correct.

e. a., b., and c. are correct

D

92. 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

d

Obligation is that of Scott not Jeanette

93. Melba incurred the following expenses for her dependent daughter during the current year:

Payment of principal on daughter's automobile loan of $3,600

Payment of interest on the above loan of 2,900

Payment of daughter's property taxes 1,800

Payment of principal on daughter's personal residence loan of 2,800

Payment of interest on daughter's personal residence loan 7,000

How much may Melba deduct in computing her itemized deductions?
a. $0.
b. $8,800.
c. $11,700.
d. $18,100.
e. None of the above.

a

94. Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows:

General representation in obtaining the divorce $1,500

Services in obtaining custody of the child 900


Services in settlement of martial property 600

Determining the tax consequences of:
Dependency deduction for child 700

Tax Consequences of property settlement 1,300


Of the $5,000 Velma pays to her attorney in 2018, the amount she may deduct as an itemized deduction is:
a. $0.
b. $700.
c. $2,000.
d. $5,000.
e. None of the above

a

legal fees that relate to tax advice are no longer deductible

95. Which of the following must be capitalized by a business?


a. Replacement of a windshield of a business truck which was broken in an accident.

b. Repair of a roof of a building used in business.

c. Amount paid for a covenant not to compete
.
d. Only b. and c. must be capitalized.

e. a., b., and c. can be expensed rather than capitalized.

c

99. Nikaya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct?

a. Nikaya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis).

b. Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikaya).

c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.

d. Only a. and b. are correct.

e. a., b., and c. are correct

C