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Exam 6: Deductions and Losses: in General

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Question 31

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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) False

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Question 32

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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) False

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Question 33

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

If a residence is used primarily for personal use (rented for fewer than 15 days per year) , which of the following is correct?

Legal expenses incurred in connection with rental property are deductions from AGI.

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

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

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: $\begin{array}{llr} \text {Gross rental income } &&\$4,000\\ \text { Less: Mortgage interest and property taxes} &\$3,500\\ \text { Other allocated expenses } &2,000&(5,500) \\ \text { Net rental loss } &&(\$1,500) \\\end{array}$ 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?

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.

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

The portion of a shareholder­employee's salary that is classified as unreasonable has no effect on the amount of a shareholder­employee's gross income, but results in an increase in the taxable income of the corporation.

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?

Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1) the business is not acquired; and (2) the business is acquired?

Under the "one­year 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.

Martha rents part of her personal residence in the summer for 3 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.

Which of the following is incorrect?

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?

If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses are disallowed?

An expense need not be recurring in order to be "ordinary."

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, 2014. 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, 2014. How much can Taylor deduct as rent expense for 2014?