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Exam 5: Business Deductions

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Question 31

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On April 5, 2018, Orange Corporation purchased, and placed in service, seven-year class assets costing $1,030,000 and five-year class assets costing $140,000.Orange elects to expense the maximum amount under § 179.Orange does not take additional first-year depreciation.Assume taxable income is not a limitation.Determine Orange Corporation's maximum cost recovery with respect to the assets for 2018.

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Question 32

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Which of the following is not a related party for constructive ownership purposes under § 267?

A) The taxpayer's aunt.
B) The taxpayer's brother.
C) The taxpayer's grandmother.
D) A corporation owned more than 50% by the taxpayer.
E) None of the above.

F) B) and E)
G) A) and C)

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Question 33

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Gerald, a cash basis taxpayer, owns 70% of the stock of Black Corporation, a calendar year, accrual basis C corporation.On December 31, 2018, Black accrued a bonus of $80,000 to Gerald, and paid the bonus to Gerald on January 2, 2019.When does Gerald report the bonus, and when does Black Corporation deduct the bonus? Would your answers change if Gerald was a 40% shareholder of Black?

In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale.Five months later, James sold the same stock through his broker for $27,000.What is the tax effect of these transactions?

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

In 2017, Robin Corporation incurred the following expenditures in connection with the development of a new product: In 2018, Robin incurred the following additional expenditures in connection with the development of the product: In October 2018, Robin began receiving benefits from the project.If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.

The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and Board of Directors.

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income producing factor in the business.

The luxury auto cost recovery limits applies to all automobiles.

Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.

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

Under MACRS, the double-declining balance method is used for property other than real estate with a recovery period of 15 or 20 years.

On January 1, 2018, SymboNet Company completed its acquisition of NetOpen.As part of the acquisition, $2 million was allocated to goodwill.What is SymboNet's amortization deduction related to the goodwill for 2018?

Rod paid $1,950,000 for a new warehouse on April 14, 2018.He sold the warehouse on September 29, 2023.Determine the cost recovery deduction for 2018 and 2023.

Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor.Can Abner deduct these political contributions?

On July 15, 2018, Mavis paid $275,000 for improvements on a commercial building she owns.Determine the maximum total cost recovery from the improvements in 2018.

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