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Exam 6: Deductions and Losses: in General

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Question 61

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In preparing his 2011 Federal income tax return,Sam,who is not married and using single filing status,incorrectly claimed alimony payments of $12,000 as an itemized deduction (rather than as a deduction for AGI) .Sam's AGI is $60,000 and itemized deductions (which consist of the alimony,property taxes,and mortgage interest) are $20,000.Which of the following statements is correct?

A) The error will result in taxable income being overstated.
B) The error will result in taxable income being understated.
C) The error could result in either taxable income being overstated or understated.
D) The error will have no effect on taxable income.
E) None of the above.

F) B) and E)
G) C) and D)

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Question 62

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Calvin opened his dental practice (a sole proprietorship)in May 2011.At the end of the year,he has unpaid accounts receivable of $36,000 and no unpaid accounts payable.Should Calvin use the accrual method or the cash method for his dental practice?

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Question 63

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

Calculate the net income includible in taxable income for the following hobby:

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

Susan rents part of her personal residence in the summer for 10 days for $1,000.Anne rents all of her personal residence for 3 weeks in December for $2,500.Anne must include the $2,500 in her gross income whereas Susan is not required to include the $1,000 in her gross income.

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

Distinguish between deductible bribes and nondeductible bribes.

Sandra owns an insurance agency.The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. Calculate Sandra's net profit using the cash method for 2011. Sandra's accrual method net profit is calculated as follows:

What losses are deductible by an individual taxpayer?

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. Which of the following statements is correct?

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

A political contribution to the Democratic Party or the Republican Party is not deductible,but a contribution to the Presidential Election Campaign Fund is deductible.

Priscilla incurs qualified moving expenses of $7,000.If she is reimbursed by her employer,the deduction is classified as a deduction for AGI.If not reimbursed,the deduction is classified as an itemized deduction.

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?

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

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.

Only certain expenses associated with the production of income are classified as deductions for AGI.

Can a trade or business expense be deductible if it is necessary but not ordinary?

Velma and Josh divorced.Velma's attorney fee of $4,000 is allocated as follows: Of the $4,000 Velma pays to her attorney,the amount she may deduct as an itemized deduction is: