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Exam 6: Deductions and Losses: in General

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Question 31

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Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced his practice on February 1, 2018. In order to guarantee no rent increases during an 18-month period, he signed an 18- month lease and prepaid the $90,000 on February 1, 2018. How much can Taylor deduct as rent expense for 2018?

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Taylor is a cash basis taxpayer. Thus, h...

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Question 32

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Which of the following is not a related party for constructive ownership purposes under § 267?

A) The taxpayer's aunt.
B) The taxpayer's brother.
C) The taxpayer's grandmother.
D) A corporation owned more than 50% by the taxpayer.
E) None of the above.

F) C) and D)
G) A) and E)

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Question 33

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

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

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.?

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.

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

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

Bruce owns several sole proprietorships. Must Bruce use the same accounting method for each of these businesses?

On January 2, 2018, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2018?

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.

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.

Describe the circumstances under which a taxpayer can receive rent income from a personal residence, but does not have to report it as gross income.

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.

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.

Graham, a CPA, has submitted a proposal to do the annual audit for a municipality. Owen, the city treasurer, tells Graham that for a $1,000 fee, he will use his influence to have the audit awarded to Graham. What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?

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?

Kitty runs a brothel illegal under state law) and has the following items of income and expense. What is the amount that she must include in taxable income from her operation? $\begin{array} {l l r } \text { Income } &&\$ 200,000\\ \text { Expenses: } &&\\&\text { Rent } & 8,000 \\ &\text { Utilities } & 2,000 \\ &\text { Bribes to police } & 10,000 \\& \text { Office supplies } & 5,000 \\& \text { Legal fees } & 20,000 \\ &\text { Depreciation } & 14,000 \\ &\text { Ilegal kickbacks } & 15,000 \end{array}$

For a vacation home to be classified in the personal/rental use category, what attributes must be present?

Fines and penalties paid for violations of the law