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Exam 6: Deductions and Losses: in General

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Question 61

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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) False

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Question 62

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

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No. If a taxpayer owns multipl...

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Question 63

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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.

Tom operates an illegal drug-running operation and incurred the following expenses: Which of the above amounts reduces his taxable income?

Sandra owns an insurance agency.The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. Calculate Sandra's net profit using the cash method for 2012.

Which of the following is incorrect?

The Code defines what constitutes a trade or business.

Bobby operates a drug trafficking business.Because he has an accounting background, he keeps detailed financial records.What expenses can Bobby deduct on his Federal income tax return?

Two-thirds of treble damage payments under the antitrust law are deductible.

Which of the following is incorrect?

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

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. Which of the following statements is correct?

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.

Robin and Jeff own an unincorporated hardware store.They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0.Based on this policy, Robin and Jeff each receive a total salary of $125,000.This is paid as follows: $8,000 per month and $29,000 on December 31.Determine the amount of the salary deduction.

For an expense to be deducted as ordinary, it must be recurring in nature.

A taxpayer who claims the standard deduction cannot also deduct expenses that are classified as deductions from AGI.

Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother, Shirley, for $160,000.Walter reinvests the proceeds in the stock market.Shirley holds the land for one year and a day and sells it in the marketplace for $169,000.

Which of the following is relevant in deciding whether an activity is profit-seeking or a hobby?

Trade or business expenses are classified as deductions for AGI.Section 212 expenses, barring certain exceptions, are classified as deductions from AGI.What are these exceptions?

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