Ch 6 - South Western Federal Taxation 2021 individual income-taxes 44th edition Testbank PDF

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Chapter 06 Deductions and Losses In General - South Western Federal Taxation 2021 individual income-taxes 44th edition Testbank - Professor Joseph Callaghan...

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Chapter 06: Deductions and Losses: In General True / False 1. Deductions are allowed unless a specific provision in the tax law provides otherwise. a. True b. Fals e ANSWER: Fals e 2. Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from adjusted gross income (AGI) than he will receive for a $2,000 expenditure that is classified as a deduction for AGI. a. True b. Fals e ANSWER: True 3. Unreimbursed employment related expenses are classified as deductions for AGI. a. True b. Fals e ANSWER: Fals e 4. Section 212 expenses that are related to rent and royalty income are deductions for AGI. a. True b. Fals e ANSWER: True 5. Alice incurs qualified moving expenses of $12,000 in 2020. If she is not reimbursed by her employer, the deduction is classified as a deduction for AGI. a. True b. Fals e ANSWER: Fals e 6. Investment related expenses, such as paying a fee to an investment manager, generally are deductions from adjusted gross income in 2020. a. True b. Fals e ANSWER: Fals e Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General 7. The Code does not specifically define what constitutes a trade or business. a. True b. Fals e ANSWER: True 8. An expense need not be recurring in order to be “ordinary.” a. True b. Fals e ANSWER: True 9. 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. a. True b. Fals e ANSWER: Fals e 10. The portion of a shareholder-employee’s salary that is classified as unreasonable has no effect on the amount of the shareholder-employee’s gross income but results in an increase in the taxable income of the corporation. a. True b. Fals e ANSWER: True 11. 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. Fals e ANSWER: Fals e 12. Only under limited circumstances can a loss on the sale of a personal use asset be deducted. a. True b. Fals e ANSWER: Fals e 13. The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business). a. True b. Fals Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General e ANSWER: True 14. Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI. a. True b. Fals e ANSWER: Fals e 15. The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income-producing factor in the business. a. True b. Fals e ANSWER: Fals e 16. A taxpayer’s note or promise to pay satisfies the “actually paid” requirement for the cash basis method of accounting. a. True b. Fals e ANSWER: Fals e 17. Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the other. a. True b. Fals e ANSWER: True 18. Under the 12-month rule for the current-period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment. a. True b. Fals e ANSWER: True 19. 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. a. True b. Fals e ANSWER: Fals Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General e 20. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests. a. True b. Fals e ANSWER: True 21. 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. a. True b. Fals e ANSWER: Fals e 22. All domestic bribes (i.e., to a U.S. official) are disallowed as deductions. a. True b. Fals e ANSWER: True 23. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business. a. True b. Fals e ANSWER: Fals e 24. 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. a. True b. Fals e ANSWER: Fals e 25. The cost of legal advice associated with the preparation of an individual’s Federal income tax return that is paid in 2020 is not deductible because it is a personal expense. a. True b. Fals e ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General 26. Two-thirds of treble damage payments under the antitrust law are not deductible. a. True b. Fals e ANSWER: True 27. The legal cost of having a will prepared is not deductible. a. True b. Fals e ANSWER: True 28. Legal expenses incurred in connection with rental property are deductions from AGI. a. True b. Fals e ANSWER: Fals e 29. Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business. a. True b. Fals e ANSWER: Fals e 30. If a taxpayer operates an illegal business, no deductions are permitted. a. True b. Fals e ANSWER: Fals e 31. Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug-trafficking business do not reduce taxable income. a. True b. Fals e ANSWER: True 32. 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. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General b. Fals e ANSWER: Fals e 33. A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible. a. True b. Fals e ANSWER: True 34. For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business. a. True b. Fals e ANSWER: Fals e 35. 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. a. True b. Fals e ANSWER: True 36. 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 three out of five years) ensures treatment as a business. a. True b. Fals e ANSWER: Fals e 37. If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity. a. True b. Fals e ANSWER: Fals e 38. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183. a. True b. Fals Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General e ANSWER: True 39. A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobbyrelated expenses. a. True b. Fals e ANSWER: True 40. If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions. a. True b. Fals e ANSWER: Fals e 41. If a publicly traded corporation hires a new CEO in 2020 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000. a. True b. Fals e ANSWER: Fals e 42. Martha rents part of her personal residence in the summer for three weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income. a. True b. Fals e ANSWER: True 43. If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses. a. True b. Fals e ANSWER: True 44. If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed. a. True b. Fals e ANSWER: Fals Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General e 45. If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related expenses can be deducted. a. True b. Fals e ANSWER: Fals e 46. The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction. a. True b. Fals e ANSWER: True 47. 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. a. True b. Fals e ANSWER: Fals e 48. A vacation home at the beach that is rented for 200 days and used personally for 16 days is classified in the personal/rental use category. a. True b. Fals e ANSWER: Fals e 49. If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction. a. True b. Fals e ANSWER: Fals e 50. 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. a. True b. Fals e ANSWER: Fals Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General e 51. Ralph wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them. a. True b. Fals e ANSWER: Fals e 52. LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000 paid for the land but can deduct the $150,000 paid for the building in the current tax year. a. True b. Fals e ANSWER: Fals e 53. Purchased goodwill must be capitalized but can be amortized over a 60-month period. a. True b. Fals e ANSWER: Fals e 54. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge’s recognized loss is $5,000, and Jason’s adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized lossof Marge). a. True b. Fals e ANSWER: Fals e 55. For purposes of the § 267 loss disallowance provision, a taxpayer’s aunt is a related party. a. True b. Fals e ANSWER: Fals e Multiple Choice 56. Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2020: Salary from job Copyright Cengage Learning. Powered by Cognero.

$90,000 Page 9

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Chapter 06: Deductions and Losses: In General Alimony received from ex-wife (pre-2019 divorce) Medical expenses

10,000 7,000

Based on this information, Sammy has: a. AGI of $90,000. b. AGI of $95,000. c. AGI of $99,500. d. Deduction for medical expenses of $0. ANSWER: d 57. Trade or business expenses of a self-employed taxpayer should be treated as: a. Deductible for AGI on Schedule E. b. A deduction from AGI. c. Deductible for AGI on Schedule C. d. An itemized deduction if not reimbursed. ANSWER: c 58. Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows: Alimony(divorce finalized in 2017) Charitable contributions Contribution to a traditional IRA Expenses paid on rental property Interest on home mortgage and property taxes on personal residence State income tax

$20,000 4,000 5,500 7,500 7,200 2,200

What is Al’s AGI? a. $94,100. b. $103,000. c. $107,000. d. $127,000. ANSWER: c 59. Marsha is single, had gross income of $50,000, and incurred the following expenses: Charitable contribution Taxes and interest on home Legal fees incurred in a tax dispute Medical expenses Penalty on early withdrawal of savings

$2,000 7,000 1,000 3,000 250

Her AGI is: a. $39,750. b. $49,750. Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General c. $40,000. d. $39,750. ANSWER: b 60. Which of the following can be claimed as a deduction for AGI? a. Personal casualty losses. b. Investment interest expenses. c. Property taxes on personal use real estate. d. None of these. ANSWER: d 61. Which of the following is a deduction for AGI? a. Contribution to a traditional IRA. b. Roof repairs to a personal use home. c. Safe deposit box rental fee in which stock certificates are stored. d. Property tax on personal residence. ANSWER: a 62. Which of the following is correct? a. A personal casualty loss incurred from a presidentially declared disaster is classified as a deduction from AGI. b. Real estate taxes on a taxpayer’s personal residence are classified as deductions from AGI. c. An expense associated with rental property is classified as a deduction for AGI. d. Choices a., b., and c., are correct. ANSWER: d 63. Which of the following are deductions for AGI? a. Mortgage interest on a personal residence. b. Property taxes on a personal residence. c. Mortgage interest on a building used in a business. d. Fines and penalties incurred in a trade or business. ANSWER: c 64. Which of the following is incorrect? a. Alimony, if deductible, is a deduction for AGI. b. The expenses associated with royalty property are a deduction from AGI. c. Contributions to a traditional IRA are a deduction for AGI. d. Property taxes on taxpayer’s personal residence are a deduction from AGI ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General 65. Which of the following is not a “trade or business” expense? a. Interest on business indebtedness. b. Property taxes on business property. c. Parking ticket paid on business auto. d. Depreciation on business property. ANSWER: c 66. Which of the following is a required test for the deduction of a business expense? a. Ordinary b. Necessary c. Reasonable d. All of these ANSWER: d 67. Paula is the sole shareholder of Violet, Inc. For 2020, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet’s taxable income for 2020 is $500,000. On audit, the IRS treats $100,000 of Paula’s salary as unreasonable. Which of the following statements is correct? a. Paula’s gross income will increase by $100,000 as a result of the IRS adjustment. b. Violet’s taxable income will not be affected by the IRS adjustment. c. Paula’s gross income will decrease by $100,000 as a result of the IRS adjustment. d. Violet’s taxable income will increase by $100,000 as a result of the IRS adjustment. ANSWER: d 68. During 2019, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2020. What is the amount of the deduction for salary expense? a. If Silver uses the cash method, $175,000 in 2019 and $0 in 2020. b. If Silver uses the cash method, $0 in 2019 and $195,000 in 2020. c. If Silver uses the accrual method, $175,000 in 2019 and $20,000 in 2020. d. If Silver uses the accrual method, $195,000 in 2019 and $0 in 2020. ANSWER: d 69. Benita incurred a business expense on December 10, 2020, which she charged on her bank credit card. She paid the credit card statement that included the charge on January 5, 2021. Which of the following is correct? a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2021. b. If Benita is an accrual method taxpayer, she can deduct the expense in 2020. c. If Benita uses the accrual method, she can choose to deduct the expense in either 2020 or 2021. d. Only b. and c. are correct. ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Deductions and Losses: In General 70. Payments by a cash basis taxpayer of capital expenditures: a. Must be expensed at the time of payment. b. Must be expensed by the end of the first year after the asset is acquired. c. Must be deducted over the actual or statutory life of the asset. d. Can be deducted in the year the taxpayer chooses. ANSWER: c 71. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2020, the following associated with bad debts occur . Credit sales Collections on credit sales Amount added to the reserve Beginning balance in the reserve Identifiable bad debts during 2020 The amount of the deduction for bad debt expense for Petal for 2020 is: a. $10,000. b. $12,000. c. $22,000. d. $140,000. ANSWER: b

$400,000 250,000 10,000 –0– 12,000

72. Which of the following legal expenses are deductible for AGI in 2020? a. Incurred in connection with a trade or business. b. Incurred in connection with rental or royalty property held for the production of income. c. Incurred for tax advice relative to the preparation of an individual’s income tax return. d. Only a. and b. qualify. ANSWER: d 73. Rex, a cash basis calendar year taxpayer, runs a bingo operation that is illegal under state law. During 2020, a bill designated H.R. 9 is introduced into the state legislature, which, if enacted, would legitimize bingo games. In 2020, Rex had the following expenses: Operating expenses in conducting bingo games Payoff money to state and local police Newspaper ads supporting H.R. 9 Political contributions to legislators who support H.R. 9 Of these expenditures, Rex may deduct: a. $247,000. b. $250,000. c. $258,000. d. $282,000. ANSWER: a Copyright Cengage Learning. Powered by Cognero.

$247,000 24,000 3,000 8,000

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Chapter 06: Deductions and Losses: In General 74. Andrew, who operates a laundry business, incurred the following expenses during the year. ∙ ∙ ∙ ∙

Parking ticket of $250 for one of his delivery vans that parked illegally. Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa. DUI ticket of $500 while returning from the rock concert. Attorney’s fee of $600 associated with the DUI ticket.

What amount can Andrew deduct for these expenses? a. $0. b. $250. c. $600. d. $1,425. ANSWER: a 75. Which of the following may be d...