Prentice Hall's Federal Taxation 2013 Individuals, 26e (Pope) Chapter I6 Deductions and Losses

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1) To be tax deductible, an expense must be all of the following except A) ordinary and necessary. B) paid in cash. C) reasonable in amount. D) an expense of the taxpayer. 2) Which of the following is not required for an expenditure to be deductible as a business or investment expense? A) recurring in nature B) ordinary and necessary C) reasonable in amount D) incurred by the taxpayer 3) Which of the following expenditures is tax deductible? A) capital expenditures B) expenses related to tax-exempt income C) expenses related to a trade or business D) expenses that are illegal or in violation of public policy 4) Maria pays the following legal and accounting fees during the year: Legal fees in connection with trade or business Legal fees related to purchase of personal residence Legal fees related to tax deficiency related to Schedule A itemized deductions Tax return preparation fees: Allocable to preparation of Schedule C Tax return preparation fees: Allocable to preparation of remainder of return What is the total amount of her for AGI deduction for these fees? A) $4,000 B) $6,000 C) $8,100 D) $11,200 $4,000 2,600 500 2,000 2,100

5) Leigh pays the following legal and accounting fees during the year: Legal fees in connection with a contract dispute in her trade or business Legal fees related to resolving a tax deficiency related to business Tax return preparation fees: TAX2000 Fall 2012 Chapter 6 $8,800 4,000 1,000

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000 6) During the current year.000 is taxable to Laura.000 is deductible by the corporation. $750. Carole reports the value of the personal use of the jet. In addition. she also uses the jet to take several personal vacations. Rick. mortgage interest of $900 and liability insurance of $500. $750.000 is deductible by the corporation. C) deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses. Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle. Pamela started a new restaurant and. Carole must travel extensively and does so on the company jet. 8) Laura.000 is taxable to Laura.000 for compensation expense. to establish goodwill. paid off the debts of $100. $600.700 D) $4. C) The corporation takes a deduction of $140. D) None of the above. $140. Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably-sized corporations.000. as additional compensation. which of the following is true? A) $600. D) $750. She was under no obligation to do so. receives an annual salary of $750.000 as miscellaneous income.000 D) $20. 9) Carole owns 75% of Pet Foods.000 C) $15. In the current year.000 is deductible by the corporation. 10) Mark and his brother. $600.000 is deductible by the corporation. Inc. B) capitalized because the expenses are not ordinary. each own farms. B) The $140. As CEO. the controlling shareholder and an employee of Southwest Corporation.000 is taxable to Laura.000 of feed and gives Rick one-half of the feed.000 for dividend expense.000.400 C) $3. C) $750.200 5. D) The corporation takes a deduction of $140.000 has no impact on the corporation's income tax.800 B) $14. The $100. Martin intends to rent the land as pastureland and hopefully sell it later for a profit. As a result.000 of Green Restaurant. Mark purchases $2. B) $600. How much of these expenses can Martin deduct (before any limitations) on his current tax return? A) $0 B) $1. Martin receives no rent but he does pay taxes of $2.800.Allocable to Schedules A and B Tax return preparation fees: Allocable to Schedule C Legal fees incident to a divorce What is the total amount of her for AGI deduction for these fees? A) $10. Which of the following is true in terms of the corporation? A) The corporation includes $140. Martin purchases undeveloped land as an investment.000 is A) deductible currently as an itemized deduction.000.000 1. the IRS contends that Laura's salary should be no higher than $600. Mark tells Rick that there is no need to repay him and to TAX2000 Fall 2012 Chapter 6 2 . The Court upheld the IRS's position.000 is taxable to Laura.200 7) Pamela was an officer in Green Restaurant which subsequently went bankrupt.

B) Mark can deduct $1.000 for AGI B) $18. He incurs $18. He incurs $10. the land is vacant and unproductive.000 What is the total amount of deductible expenses? A) $115. During the current year he incurred the following: Gasoline and Oil $ 100. Ignore any possible investment interest expense limitation.500 each year. 14) Emeril borrows $340. Which of the following statements is true of the property taxes during the construction period? A) Ivan must capitalize the property taxes on both properties each year if an election is made.000 Maintenance $ 15. 12) During 2011 and 2012.000 Fines for Speeding and Illegal parking $ 8.500 in 2012. Danny pays property taxes of $3. C) The expenditure restores the property. D) None of the above is true. How much of the interest expense is deductible.000 B) $123.000 for AGI D) $9.500 each year on a piece of land.consider the feed a gift.000 for the feed. B) The expenditure provides a betterment. In 2012 Danny uses the land as a parking lot and generates $16. adding to the value of the property. adding to the value of the property. 11) Which of the following factors is important in distinguishing between capital and revenue expenditures? A) The expenditure improves the property.000 for the hotel. C) Capitalize $3.000 investment interest expense. the TAX2000 Fall 2012 Chapter 6 3 .000 D) $144. 13) During the current year.000 in property taxes during the construction of the office building and $15. allocated equally between the taxable and tax-exempt investments.000 in income.000 16) During the current year.000 to finance taxable and tax-exempt investments.000 from AGI 15) Jimmy owns a trucking business. Ivan begins construction of an office building and a hotel. C) Rick must report $1. B) Ivan must deduct the property taxes on both properties each year. D) All of the above.500 in 2011 and deduct $3. the United States files criminal and civil actions against Joe. B) Deduct $3. D) Either B or C is acceptable. C) Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year.500 each year. D) Ivan may elect to capitalize the property taxes for the properties in one year and then deduct the property taxes on the properties the next year. Which of the following statements is true? A) Mark can deduct $2.000 as income.000 Bribes to Government Inspection Officials $ 21.000 C) $108.000 for the feed.000 from AGI C) $9. Which of the following is true regarding the property taxes? A) Capitalize $3. During 2011. and where is it deductible? A) $18.

000. he spent $2. In settlement. $200. Subsequent to this action. $60.000. Both enter pleas of no contest and appropriate judgments are entered.000.700 in consulting fees to find the best location and $3. and bribes to police.000.200. What is the maximum amount that Box and Cable may each deduct? A) $400.200 investigating such possibilities in Phoenix. $2.000. is trying to persuade Congress to enact nationwide anti-smoking legislation.. $60.000 C) $500.600 in professional fees setting up an accounting and inventory system. owner of a cupcake shop in New York.000.000 to candidates for political office who support limiting public smoking. Marcus began investigating the possibility of opening a specialty clothing store. Box and Cable each pay Square $1.000. AH also contributed $100.000. AH paid $500.000 B) $1. Toby decides against opening the store. $70.000 19) American Healthcare (AH). C) $330. Although he had never run his own business before.200. is considering opening a similar business (i.000. utilities expense. From March through June. in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance.000. for price fixing. an insurance company. insurance expense. How much of the contribution can Pat deduct? A) $0 B) $100. B) $200.000.200 TAX2000 Fall 2012 Chapter 6 4 .000 20) In March of the current year.000 to hire a lobbying firm to discuss its concerns with members of Congress. an insurance executive. What is the maximum amount of deduction for the current year attributable to these expenditures? A) $-0B) $420 C) $840 D) $4. As part of this effort. What is the maximum amount of deduction for the current year attributable to these expenditures? A) $0 B) $5.000 C) $500. and Jane. 18) Pat. His deductible expenses are A) $-0-.000 D) $6.600 21) Toby. on August 1 he opened his doors for business.000.300 on a market survey.000 17) Troy incurs the following expenses in his business (illegal gambling establishment): Salaries to employees.000 D) $600. After spending $4.100 D) $8. What amount of these expenditures can AH deduct? A) $0 B) $100.000 D) $1.000 C) $2.000 to the re-election campaign of Governor Stephens.000. D) $390.CEO of Box Corporation.e.000 C) $5. a cupcake shop) in Phoenix.000. contributed $1. the president of Cable Corporation. Square Corporation sues both Box and Cable for treble damages of $6.

Inc. signs a lease for office space and begins business. Inc. Sharon. Sharon pays the $12.750 C) $5. (he will pay the credit card bill in January) and also purchased $600 of supplies at XYZ on open account (he will make a payment on the open account in January).22) Jones. is in the air conditioner repair business.600 rent for the entire 36-month lease term. At the time the lease is signed. The business uses the cash method. a calendar-year taxpayer. In December of the current year.600 TAX2000 Fall 2012 Chapter 6 5 . How much can Sharon deduct this year? A) $350 B) $1. Jones charged $100 of supplies at Refrigeration. The lease is for 3 years. in the current year? A) $100 B) $600 C) $700 D) The amounts must be capitalized and charged to expense as used. What is the amount that is deductible by Jones.. Inc.. a cash method taxpayer.950 D) $12.. 23) On August 1 of this year.

C) The amount of the liability is determined with reasonable accuracy. The loan is secured by the residence and the charging of points is an established business practice in the area. borrows $10. The term of the loan is 20 years.700 cash proceeds. of the points may Terry deduct in the current year? A) $0 B) $100 C) $240 D) $4. beginning on August 1 of the current year. Terry is required to pay two points on the loan. he may deduct A) $300 next year. D) The services must actually be provided.200 D) $6. C) the expense is material.400 28) Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received? A) The liability must be paid. if any.800 27) On July 1 of the current year. B) $300 this year. C) A tax deduction is allowed for a contested amount if the amount is paid prior to final settlement. The term of the loan is 20 years. B) The existence of a liability must be established. if any. a cash method taxpayer. TAX2000 Fall 2012 Chapter 6 6 .000.000 from the bank for use in his business. Robert. Terry refinances her home and borrows $240. How much. How much.000. Under the terms of the loan. beginning on July 1 of the current year.24) On December 1. B) the expense is recurring. paying Robert the $9. The loan is secured by the residence and the charging of points is an established business practice in the area. Marcia is required to pay two points on the loan. If Robert repays the loan next year. recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for A) the all-events test is met. Marcia purchases a new home and borrows $320. D) No tax deduction is allowed to an accrual basis taxpayer for the amount of a down payment for a non-recurring expense when the work is to be performed in a subsequent period. B) A tax deduction is allowed in association with a warranty only in the year in which warranty work is performed. the bank discounts the loan by $300. of the points may Marcia deduct in the current year? A) $0 B) $160 C) $3. 30) Under the accrual method. C) $25 this year and $275 next year." 25) In which of the following situations are points paid on a home mortgage loan not deductible in the year of payment? A) purchase B) refinance C) construction D) improvement 26) On August 1 of the current year. 29) All of the following statements are true except A) A tax deduction is allowed to a taxpayer for estimated warranty expense. D) nothing since the note is "noninterest-bearing.

Samuel purchases 40 shares of R Corporation preferred stock.000. On January 4 of the following year. owns 400 shares of Yale Corporation stock that she purchased two years ago for $4.600 Basis $2. owns 100 shares of AB Corporation stock. D) $1.000. purchases 60 shares of AB Corporation stock. C) $600. Basis $ 800. What percent ownership does Sarah directly or constructively own in Elton Corporation? A) 40% B) 64% TAX2000 Fall 2012 Chapter 6 7 . owns 100 shares of R Corporation common stock which was purchased two years ago for $3. which was purchased three years ago for $5. Samuel sells all 100 shares on December 27 of the current year for $1. of the following year.600. of the current year. for $4.200 D) Recognized Loss $1. Basis $2. Ashley's recognized loss and her basis in the newly purchased 300 shares of Yale Corporation stock are A) Recognized Loss Basis $0 $3.000 and on January 5. a calendar year taxpayer. D) $2. Samuel's recognized loss will be A) $0.000.D) economic performance occurs within the shorter of 8 1/2 months after the close of the year or a reasonable period after the close of the year.040. In the current year Ashley sells all 400 shares of the Yale Corporation stock for $2. B) Recognized Loss $400 C) Recognized Loss $1. On January 4 of the following year.000. a calendar year taxpayer. Sarah. 34) Which of the following individuals is not considered a relative for purposes of the loss disallowance rules under Sec. B) $960. Victor's recognized loss will be A) $0. 31) Victor.200. Sarah also owns 40% of Elton Corporation. The remaining shareholders of Elton Corporation are: Erin (24%) and Sarah's uncle (36%). C) $1. Victor sells all 100 shares on December 27.000. 267? A) brother B) husband C) sister-in-law D) grandfather 35) Erin. and Timmy are equal partners in EST Partnership.000.600. a calendar year taxpayer. 32) Ashley.400 on December 27. B) $400. 33) Samuel. Ashley purchases 300 shares of Yale Corporation stock for $800.

Subsequently. for its fair market value of $30. which has a basis of $12. Which of the following is true for the Sheila and the Daughter? A) Sheila Daughter recognizes no loss recognizes loss of $2.000. C) ($3. Explanation: Selling Price Minus: Cost Gain Minus: Previously disallowed loss ($60.000) Taxable gain 37) Donald sells stock with an adjusted basis of $38.. D) ($4.000. the stock's fair market value.000 to JJ Inc.000).000.000. his 60% owned corporation.000. Kiefer. Explanation: Selling Price Minus: Cost Gain Minus: Previously disallowed loss ($30.000. Explanation: Selling Price Minus: Cost Loss 39) Sheila sells stock. D) ($8. the daughter sells the stock to an unrelated party for $5. B) $2.000 to his son. JJ Inc. C) $1.000. JJ Inc.000 $66.000) loss. B) ($1. Her brother's basis was $20. for its fair market value of $60.000. sells the stock three years later for $67.000) loss.000).000 $38. Kiefer sells the stock three years later for $32. she will recognize A) $-0-.C) 76% D) 100% 36) Jason sells stock with an adjusted basis of $66.'s recognized gain or loss on the sale will be A) $-0-.000.000.000) loss.000. If Dana sells the asset to an unrelated party for $12.000. D) $4. Kiefer will recognize a gain on the subsequent sale of A) $-0-. B) ($3.000). to her daughter for $7.000 TAX2000 Fall 2012 Chapter 6 8 . C) ($6.000.000) Taxable gain 38) Dana purchased an asset from her brother for $15.

000? A) 2011 B) 2012 C) Either 2011 or 2012 D) The expense is not deductible since Samantha is Bart's sister. did some advertising work for Bart's business in November 2011.000. 42) Which of the following factors is not used to determine whether an activity is a hobby or a business? A) the taxpayer's expertise in the activity B) the taxpayer's financial status C) the personal pleasure derived from the activity D) the success of the taxpayer in other dissimilar activities 43) For the years 2008 through 2012 (inclusive) Max. Only in 2011 and 2012 did his income exceed the expenses from the activity.000 to his daughter for $2. Bart paid Samantha the $5.000 in January 2012.000 40) Rob sells stock with a cost of $3. In December.000 Daughter Recognizes gain of $200 41) Bart operates a sole proprietorship for which he uses the accrual method of accounting.000 D) Sheila Daughter recognizes loss of $3.000 C) Sheila Daughter recognizes loss of $3.000 Daughter Recognizes gain of $200 Daughter Recognizes gain of $1. Which of the following describes the tax treatment to Rob and Daughter? A) Rob Recognizes no loss B) Rob Recognizes no loss C) Rob Recognizes $800 loss D) Rob Recognizes $800 loss Daughter Recognizes gain of $1.000 recognizes loss of $2. which is its fair market value. Later the daughter sells the stock for $3. a surgeon. When may Bart deduct the $5. Both Bart and Samantha are calendar year taxpayers.200 to an unrelated party. Bart received a billing statement from Samantha for $5.200. has been involved in raising poodles.000 recognizes loss of $5. a cash method taxpayer.B) Sheila recognizes no loss Daughter recognizes loss of $5. Bart's sister Samantha. Which statement is correct? TAX2000 Fall 2012 Chapter 6 9 .

B) The activity is a hobby. During the current year.000 800 2. the IRS may prove it is a hobby. However. D) The activity is presumed to be a hobby. Mary cannot prove it is a business. Max may prove it is a business. D) The activity is presumed to be a hobby. Income Entry fees Depreciation on car Gasoline Interest on home equity loan for race car Insurance premiums $7. 2009 and 2010 her income exceeded the expenses from the activity.700 1.200 in supplies and $900 in depreciation. B) The activity is a hobby. 46) Kyle drives a race car in his spare time and on weekends. However.200 in supplies. However. C) The activity is presumed to be a business.A) The activity is a business.100 1.500 in utilities.200. $1. Max cannot prove it is a business. Her related expenses include $1. C) $1.400 D) $1.700 Explanation: Income Minus: Interest on loan for race car Income before tier 2 expenses Tier 2 expense: Entry fees Tier 2 expense: Gasoline Tier 2 expense: Insurance premiums Total tier 2 expenses Net income before tier 3 expenses Depreciation on car Deductible depreciation (limit = TAX2000 Fall 2012 Chapter 6 10 . $1.500 in utilities. C) The activity is presumed to be a business. In 2011 and 2012. Mary may prove it is a business. The IRS cannot prove it is a hobby. 45) Abigail's hobby is sculpting. a a best-selling author.800 2. The IRS cannot prove it is a hobby. Of the total expenses incurred.500 What is the allowable deduction (before any AGI limitation) for depreciation assuming that this activity is not engaged in for profit and Kyle can itemize his deductions? A) $0 B) $300 C) $1. and $500 in depreciation. has been involved in operating an antique store. 44) For the years 2008 through 2012 (inclusive) Mary. B) $1. Abigail sold three of her sculptures for a total of $3. Which statement is correct? A) The activity is a business. the antique store generated a loss.500 in utilities and $1. Abigail may deduct A) $0. However. D) $1.200 in supplies and $900 in depreciation. In 2008. the IRS may prove it is a hobby.200 in supplies.500 in utilities. His records regarding this activity reflect the following information for the year. $1.

In the current year.000 of hobby income and deduct $400 of hobby expenses for AGI. D) report no hobby income and no hobby deductions.000 of hobby income and deduct $500 of hobby expenses from AGI. she should A) report $5.000 from her blanket sales and incurs expenses of $600. C) report $5. TAX2000 Fall 2012 Chapter 6 11 . On her tax return. she earns $5.1.000 of hobby income and deduct nothing from AGI since Juanita does not itemize deductions. Juanita does not itemize deductions.400) 47) Juanita knits blankets as a hobby and sells them. B) report $5.

500.800 11. C) $5. The condo is also rented to tourists for a total of 77 days and generates rental income of $10. TAX2000 Fall 2012 Chapter 6 12 . B) $1. the amount of depreciation that Abby may take with respect to the rental property will be A) $ 5. The deduction for expenses is limited to the amount of income generated by the property. 49) Mackensie owns a condominium in the Rocky Mountains. both revenue and expenses (other than those otherwise allowable) are ignored. the amount of depreciation that Mackensie may take with respect to the rental property will be A) $0. Because it is rented a nominal number of personal use days.000) Minus: Property taxes (77/365 × $3. C) property that is treated as a hobby which gives rise to from AGI deductions only. For tax purposes. B) rental property. D) a combination of the taxpayer's residence and rental property.500 2.900.000 Using the court's method of allocating expenses.900 2.100 1.500) Minus: Insurance (77/100 × $1.500) Minus: Utilities (77/100 × $2. D) $11. Abby uses the condo a total of 21 days.044.200 1. Mackensie incurs the following expenses in the condo: Expense Mortgage interest Property taxes Utilities Insurance Depreciation Amount $ 5.515. the houseboat is classified as: A) neither a residence nor rental property. During the year.200 10. Expenses in excess of income may be deducted although net income or loss is subject to the passive activity rules. B) $ 8.500 1.074.000 3.000 Using the IRS method of allocating expenses.800) Minus: Depreciation (Remaining income) Taxable rental income 50) Abby owns a condominium in the Great Smokey Mountains.48) Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days. Mackensie uses the condo a total of 23 days. The condo is also rented to tourists for a total of 79 days and generates rental income of $12.000 Explanation: Rental income Minus: Mortgage interest (77/365 × $5. C) $ 7. Abby incurs the following expenses: Expense Mortgage interest Property taxes Utilities Insurance Depreciation Amount $ 4. During the year.900.796.

200 × 79/100) Income after tier 2 expenses Depreciation ($10. lived in it for 56 days.000 for 14 days.000 × 79/100. $1.400 depreciation.D) $10. $800 property taxes.940 D) $9. The year's expenses amounted to $5.000 interest expense. and left it vacant the remainder of the year. and $2. During the year.700 52) Brent must substantiate his travel and entertainment expenses.074) 51) Nikki is a single taxpayer who owns a vacation cottage on the lake. Explanation: Income Mortgage interest ($4.100 × 79/100) Property taxes ($1.900 × 79/100 Income after tier 1 expenses Utilities ($2.000. Using the IRS method of allocating expenses. how much of the property-related expenses will be deductible for AGI? A) 0 B) $2.200 × 79/100) Insurance ($1. limited to $5. Which of the following is not required for documentation? A) company expense report B) business relationship to the taxpayer of individuals entertained C) purpose of the expenditure D) time and place of the travel or entertainment TAX2000 Fall 2012 Chapter 6 13 .000 C) $1. she rented it for $2.500 utilities and maintenance.

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