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Exam 6: Deductions and Losses: in General

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Question 31

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Petal, Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2019, the following associated with bad debts occur . $\begin{array} { l r } \text { Credit sales } & \$ 400,000 \\\text { Collections on credit sales } & 250,000 \\\text { Amount added to the reserve } & 10,000 \\\text { Beginning balance in the reserve } & - 0 - \\\text { Identifiable bad debts during 2019 } & 12,000\end{array}$ The amount of the deduction for bad debt expense for Petal for 2019 is:

A) $10,000.
B) $12,000.
C) $22,000.
D) $140,000.
E) None of these.

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

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Question 32

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Velma and Bud divorced.Velma's attorney fee of $5,000 is allocated as follows: $\begin{array} { l r } \text { General representation in obtaining the divorce } & \$ 1,500 \\\text { Services in obtaining custody of the child } & 900 \\\text { Services in settlement of martial property } & 600 \\\text { Determining the tax consequences of: } \\\quad \text { Dependency deduction for child } & 700 \\\text { Tax Consequences of property settlement } & 1,300\end{array}$ Of the $5,000 Velma pays to her attorney in 2019, the amount she may deduct as an itemized deduction is:

A) $0.
B) $700.
C) $2,000.
D) $5,000.
E) None of these.

F) A) and C)
G) A) and B)

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Question 33

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

Tom operates an illegal drug-running operation and incurred the following expenses: $\begin{array} { l r } \text { Salaries } & \$ 75,000 \\\text { Illegal kickbacks } & 20,000 \\\text { Bribes to border guards } & 25,000 \\\text { Cost of goods sold } & 160,000 \\\text { Rent } & 8,000 \\\text { Interest } & 10,000 \\\text { Insurance on furniture and fixtures } & 6,000 \\\text { Utilities and telephone } & 20,000\end{array}$ Which of the following amounts reduces his taxable income?

None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.

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.

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida and wants to expand to other states.During 2019, 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:

Cory incurred and paid the following expenses in 2019: $\begin{array} { l r } \text { Tax return preparation fee } & \$ 600 \\\text { Moving expenses } & 2,000 \\\text { Investment expenses } & 500 \\\text { Expenses associated with rental property } & 1,500 \\\text { Interest expense associated with loan to finance tax-exempt bonds } & 400\end{array}$ Calculate the amount that Cory can deduct (before any percentage limitations) .

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

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.

If a publicly traded corporation hires a new CEO in 2019 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000.

Which of the following is not deductible in 2018?

Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.

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

Deductions are allowed unless a specific provision in the tax law provides otherwise.

Agnes operates a Christmas shop in Atlantic City, NJ.She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop.Her travel expenses are $2,000 (includes $500 for meals).In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study.Determine the amount of the expenses that Agnes can deduct if: a. She opens a new shop in Vero Beach. b. She decides not to open a new shop in Vero Beach.

During the year, Rita rented her vacation home for 12 days for $2,400 and she used it personally for three months. The following expenses were incurred on the home: $\begin{array} { l r } \text { Property taxes } & \$ 2,200 \\\text { Mortgage interest } & 10,800 \\\text { Utilities and maintenance } & 1,900 \\\text { Depreciation } & 5,000 \\\text { Insurance } & 900\end{array}$ Calculate her rental gain or loss and itemized deductions.

Bob and April own a house at the beach.The house was rented to unrelated parties for eight weeks during the year. April and the children used the house 12 days for their vacation during the year.After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: $\begin{array}{lll}\text { Gross rental income } & & \$ 4,000 \\\text { Less: Mortgage interest and property taxes } & \$ 3,500 & \\\text { Other allocated expenses } & \underline{2,000} & \underline{(5,500) } \\\text { Net rental loss } & &\underline{ \underline{(\$ 1,500) }} \\\end{array}$ What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable?

Alfred's Enterprises, an unincorporated entity, pays employee salaries of $100,000 during the year.At the end of the year, $12,000 of additional salaries have been earned but not paid until the beginning of the next year. a.Determine the amount of the deduction for salaries if Alfred is a cash method taxpayer. b.Determine the amount of the deduction for salaries if Alfred is an accrual method taxpayer.