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Exam 6: Deductions and Losses: in General

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Question 61

True/False

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Generally,a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.

A) True
B) False

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Question 62

Multiple Choice

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Which of the following can be claimed as a deduction for AGI?

A) Personal casualty losses.
B) Investment interest expenses.
C) Medical expenses.
D) Property taxes on personal use real estate.
E) None of the above.

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

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Question 63

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Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?

Sandra owns an insurance agency.The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. Revenue $250,000 Salaries and commissions 100,000 Rent 10,000 Insurance 5,000 Utilities 6,000 Accounts receivable,1/1/2015 40,000 Accounts receivable,12/31/2015 38,000 Accounts payable,1/1/2015 12,000 Accounts payable,12/31/2015 11,000 Calculate Sandra's net profit using the cash method for 2015.

Which of the following is a deduction for AGI (itemized deduction) ?

Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition,if (1) the business is not acquired;and (2) the business is acquired?

Sandra sold 500 shares of Wren Corporation to Bob,her brother,for its fair market value.She had paid $26,000 for the stock.Calculate Sandra's and Bob's gain or loss under the following circumstances: a.Sandra sold the shares to Bob for $20,000.One year later,Bob sold them for $18,000. b.Sandra sold the shares to Bob for $30,000.One year later,Bob sold them for $27,000. c.Sandra sold the shares to Bob for $20,000.One year later,Bob sold them for $28,000.

Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.

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?

Assuming an activity is deemed to be a hobby,discuss the order and limits in which expenses must be deducted.

Paula is the sole shareholder of Violet,Inc.For 2015,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2015 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?

All domestic bribes (i.e. ,to a U.S.official) are disallowed as deductions.

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 1,2015.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 1,2015.How much can Taylor deduct as rent expense for 2015?

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

Janet is the CEO for Silver,Inc. ,a closely held corporation.Her total compensation for 2015 is $5 million.Of this amount,$2 million is a salary and $3 million is a bonus.The bonus was calculated as 5% of Silver's net income before the bonus and before taxes ($60 million × 5% = $3 million).The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver's performance.It is approved annually by the entire board of directors (1 of the 5 directors is an outside director) of Silver.How much of Janet's compensation can Silver deduct for 2015?

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.

Petal,Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2015,the following occur associated with bad debts. Credit sales $400,000 Collections on credit sales 250,000 Amount added to the reserve 10,000 Beginning balance in the reserve -0- Identifiable bad debts during 2015 12,000 The amount of the deduction for bad debt expense for Petal for 2015 is:

Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?

Bob and April own a house at the beach.The house was rented to unrelated parties for 8 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: Gross rental income $4,000 Less: Mortgage interest and property taxes $3,500 Other allocated expenses 2,000 (5,500) Net rental loss ($1,500) ​ 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?

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.