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Exam 6: Deductions and Losses: in General

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Question 71

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Trade and business expenses should be treated as:

A) A deduction from AGI subject to the 2%-of-AGI floor.
B) A deduction from AGI not subject to the 2%-of-AGI-of-AGI floor.
C) Deductible for AGI.
D) An itemized deduction if not reimbursed.
E) None of the above.

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

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Question 72

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Janet is the CEO for Silver,Inc.,a closely held corporation.Her total compensation for 2017 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 2017?

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All of the $5 million is deductible by S...

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Question 73

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

Petal,Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2017,the following occur associated with bad debts. The amount of the deduction for bad debt expense for Petal for 2017 is:

Graham,a CPA,has submitted a proposal to do the annual audit for a municipality.Owen,the city treasurer,tells Graham that for a $1,000 fee,he will use his influence to have the audit awarded to Graham.What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?

Briefly discuss the disallowance of deductions for capital expenditures.

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense.If the same amount is paid to the CEO of IBM,only $1 million is deductible.

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.

Mattie and Elmer are separated and are in the process of obtaining a divorce.They incur legal fees for their respective attorneys with the expenses being itemized as follows: ​ Although there is no requirement that he do so,Elmer pays Mattie's lawyer as a gesture of the positive feelings he still has for her. a.Determine the deductions for Mattie and for Elmer. b.Classify the deductions as for AGI and from AGI.

The cost of legal advice associated with the preparation of an individual's Federal income tax return is not deductible because it is a personal expense.

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.

A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.

Tracy invested in the following stocks and bonds during 2017. To finance the investments,she borrowed $100,000 from Swan Bank.Interest expense paid on the loan during 2017 was $5,000.During 2017,Tracy received $1,250 of dividend income from Blue,Inc.and $3,000 of interest income on the municipal bonds. a.​Determine the amount of Tracy's gross income. b.Determine the maximum amount of Tracy's deductible interest expense.

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

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

Discuss the application of the "one-year rule" on prepayments by a cash basis taxpayer.

Trade or business expenses are classified as deductions for AGI.Section 212 expenses,barring certain exceptions,are classified as deductions from AGI.What are these exceptions?

Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000.Beulah converts the property to rental use this year.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.

The Code does not specifically define what constitutes a trade or business.

Velma and Bud divorced.Velma's attorney fee of $5,000 is allocated as follows: ​ Of the $5,000 Velma pays to her attorney,the amount she may deduct as an itemized deduction is: