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Exam 6: Deductions and Losses: in General

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Question 51

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In order to protect against rent increases on the building in which she operates a dance studio,Mella signs an 18-month lease for $18,000.The lease commences on November 1,2010.How much of the $18,000 payment can she deduct in 2010 and 2011?

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a.If Mella is an accrual basis taxpayer?...

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Question 52

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Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount.

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B) False

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Question 53

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

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance test.

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 $0 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 disallowed loss of Marge).

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.

If a taxpayer cannot satisfy the three-out-of-five year presumption test associated with hobby losses,then expenses from the activity cannot be deducted in excess of the gross income from the activity.

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: 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?

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

Only certain employment related expenses are classified as deductions for AGI.

Marvin spends the following amounts on a house he owns:

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?

Clark operates a gambling operation,which is an illegal business under the laws of Texas.Therefore,none of the expenses of the business are deductible.

The legal cost of having a will prepared is deductible.

On January 2,2010,Fran acquires a business from Chuck.Among the assets purchased are the following intangibles: patent with a 9-year remaining life,a covenant not to compete for 12 years,and goodwill. Of the purchase price,$150,000 was paid for the patent and $48,000 for the covenant.The amount of the excess of the purchase price over the identifiable assets was $87,000.What is the amount of the amortization deduction for 2010?

For an activity classified as a hobby,the expenses are categorized as follows: (1) Amounts deductible under other Code sections without regard to the nature of the activity,such as property taxes and home mortgage interest. (2) 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) . (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:

Hollis operates a lawn care service in southeastern Missouri.He incurs $63,000 of expenses determining the feasibility of expanding the business to southwestern Missouri.If he expands the business,the $63,000 is deductible in the current year.If he does not do so,then he must amortize the $63,000 over a 180-month period.

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

Arnold and Beth file a joint return.Use the following data to calculate their deduction for AGI.

The concept of reasonableness applies not only to salaries but also to other business expenses.