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Exam 5: Business Deductions

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Question 91

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Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.

A) True
B) False

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Question 92

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For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party.

A) True
B) False

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Question 93

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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 2016.

Janet is the CEO for Silver, Inc., a closely held corporation. Her total compensation for 2016 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 2016?

Jim acquires a new seven-year class asset on September 20, 2016, for $80,000. He placed the asset in service on October 5, 2016. He does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. He takes additional first-year depreciation. He sells the asset on August 25, 2017. This is the only asset he acquires in 2016. Determine Jim's cost recovery in 2016 and 2017.

Pink, Inc., a calendar year C corporation, manufactures golf gloves. For the current year, Pink had taxable income (before DPAD) of $900,000, qualified domestic production activities income of $750,000, and W-2 wages related to qualified production activities income of $140,000. Pink's domestic production activities deduction for the current year is:

If part of a shareholder/employee's salary is classified as unreasonable, determine the effect on the: a.Shareholder/employee's gross income. b.Corporation's taxable income.

Last year, Green Corporation incurred the following expenditures in the development of a new plant process: ​ During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if: a.​She opens a new shop in Vero Beach. b.She decides not to open a new shop in Vero Beach.

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

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

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

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

During the current year, Owl Corporation (a C corporation) , a retailer of children's apparel, made the following donations to qualified charitable organizations. How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation) ?

Rod paid $1,950,000 for a new warehouse on April 14, 2016. He sold the warehouse on September 29, 2021. Determine the cost recovery deduction for 2016 and 2021.

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2016, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2016, Rex had the following expenses: Of these expenditures, Rex may deduct:

In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered?

Goodwill associated with the acquisition of a business cannot be amortized.