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Exam 6: Deductions and Losses: in General

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Question 61

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Susan is a sales representative for a U.S.weapons manufacturer.She makes a $100,000 "grease" payment to a U.S.government official associated with a weapons purchase by the U.S.Army.She makes a similar payment to a Saudi Arabian government official associated with a similar sale.Neither of these payments is deductible by Susan's employer.

A) True
B) False

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Question 62

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Assuming an activity is deemed to be a hobby, discuss the order and limits in which expenses must be deducted.

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Amounts deductible under other Code sect...

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Question 63

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In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business.

If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.

Because it has only one owner, any sole proprietorship is permitted to elect the cash method of accounting.

Under no circumstance can a loss on the sale of a personal use asset be deducted.

During the year, Martin rented his vacation home for three months and spent one month there.Gross rental income from the property was $5,000.Martin incurred the following expenses: mortgage interest, $3,000; real estate taxes, $1,500; utilities, $800; maintenance, $500; and depreciation, $4,000.Compute Martin's allowable deductions for the vacation home. Since the vacation home is rented for 15 or more days and is used for personal purposes for more than the greater of (1) 14 days or (2) 10% of the rental days, the deductions are scaled down, using the court's approach, as follows: Thus, Martin may deduct $1,125 taxes and interest, $975 utilities and maintenance, and $2,900 depreciation against the gross income of $5,000.The personal portion of taxes and interest ($3,375) is deductible as an itemized deduction.Example 29

In distinguishing whether an activity is a hobby or a trade or business, discuss the presumptive rule.

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

If an item such as property taxes and home mortgage interest exceed the income from a hobby, the excess amount of this item over the hobby income cannot be deducted if the taxpayer itemizes deductions.

Which of the following must be capitalized by a business?

Which of the following is correct?

A cash basis taxpayer who charges an expense on a bank credit card is allowed to claim a deduction currently, whereas a cash basis taxpayer who charges an expense on a department store credit card is not allowed to claim a deduction until payment is made.

Hobby activity expenses are deductible from AGI to the extent of hobby income.Such expenses not in excess of hobby income are not subject to the 2% of AGI floor.

Janice is single, had gross income of $38,000, and incurred the following expenses: Her AGI is:

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

Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?

Alfred's Enterprises, an unincorporated entity, pays employee salaries of $92,000 during the year. At the end of the year, $9,000 of additional salaries have been earned but not paid until the beginning of the next year.

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

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?