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Exam 6: Deductions and Losses in General

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Question 51

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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?

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The payment from Graham to Owen appears ...

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Question 52

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Terry and Jim are both involved in operating illegal businesses.Terry operates a gambling business and Jim operates a drug running business.Both businesses have gross revenues of $500,000.The businesses incur the following expenses. Terry Jim Employee salaries $200,000 $200,000 Bribes to police 25,000 25,000 Rent and utilities 50,000 50,000 Cost of goods sold -0- 125,000 Which of the following statements is correct?

A) Neither Terry nor Jim can deduct any of the above items in calculating the business profit.
B) Terry should report profit from his business of $250,000.
C) Jim should report profit from his business of $500,000.
D) Jim should report profit from his business of $250,000.
E) None of the above.

F) A) and D)
G) All of the above

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Question 53

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Albie operates an illegal drug-running business and has the following items of income and expense.What is Albie's adjusted gross income from this operation? Income $800,000 Expenses: Rent 24,000 Utilities 9,000 Bribes to police 55,000 Medical expense 5,000 Legal fees 25,000 Depreciation 30,000 Illegal kickbacks 30,000 Cost of goods sold 300,000

On January 2,2016,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 2016?

Which of the following statements is correct in connection with the investigation of a business?

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

What is the appropriate tax treatment for expenditures paid by a taxpayer for another's benefit?

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

For an activity classified as a hobby,the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g. ,depreciation,amortization,and depletion) . (2) Amounts deductible under other Code sections without regard to the nature of the activity,such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit,but only if those amounts do not affect adjusted basis (e.g. ,maintenance,utilities,and supplies) . If these expenses exceed the gross income from the activity and are thus limited,the sequence in which they are deductible is:

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? Income $200,000 Expenses: Rent 8,000 Utilities 2,000 Bribes to police 10,000 Office supplies 5,000 Legal fees 20,000 Depreciation 14,000 Illegal kickbacks 15,000

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.

Mitch is in the 28% tax bracket.He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.

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.

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 1,2016.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 1,2016.How much can Taylor deduct as rent expense for 2016?

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

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.

Walt 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.

In order to protect against rent increases on the building in which she operates a dance studio,Mella signs an 18-month lease for $36,000.The lease commences on October 1,2016.How much of the $36,000 payment can she deduct in 2016 and 2017? a.If Mella is an accrual basis taxpayer? b.If Mella is a cash basis taxpayer?

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?

Two-thirds of treble damage payments under the antitrust law are not deductible.