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Exam 6: Deductions and Losses: in General

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Question 1

True/False

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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.

A) True
B) False

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Question 2

Multiple Choice

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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.

F) None of the above
G) A) and E)

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Question 3

Multiple Choice

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Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: $\begin{array}{llcc} \text {General representation in obtaining the divorce } & \$ 1,500 \\ \text { Services in obtaining custody of the child } &900\\ \text { Services in settlement of martial property } &600\\ \text { Determining the tax consequences of: } &\\ \text { Dependency deduction for child } &700\\ \text { Tax Consequences of property settlement} &1,300\\\end{array}$ Of the $5,000 Velma pays to her attorney in 2018, the amount she may deduct as an itemized deduction is:

Are there any circumstances under which lobbying expenditures are deductible?

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:

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.

What is the appropriate tax treatment for expenditures paid by a taxpayer for another's benefit?

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?

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.

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

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

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

Discuss the application of the "one-year rule" on prepayments by a cash basis taxpayer.

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.

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 associated with the DUI ticket. What amount can Andrew deduct for these expenses?

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

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.

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 baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.