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  1. In preparing his 2011 Federal income tax return, Sam, who is not
  2. married and using single filing status, incorrectly claimed alimony
  3. payments of $12,000 as an itemized deduction (rather than as a
  4. $20,000. Which of the following statements is correct?
  5. overstated or understated.
  6. *d. The error will have no effect on taxable income.
  7. Trade and business expenses should be treated as:
  8. *c. Deductible
  9. Paul is single, age 63, and has gross income of $70,000. His deductible
  10. Alimony
  11. Charitable contributions
  12. Contribution to a traditional IRA
  13. Expenses paid on rental property
  14. Interest on home mortgage and property taxes on personal residence
  15. State income tax
  16. What is Paul’s AGI?
  17. $15,000
  18. 2,000
  19. 5,000
  20. 7,500
  21. 6,800
  22. 2,200*b. $42,500.
  23. Janice is single, had gross income of $38,000, and incurred the
  24. following expenses:
  25. Charitable contribution
  26. Taxes and interest on home
  27. Legal fees incurred in a tax dispute
  28. Medical expenses
  29. Penalty on early withdrawal of savings
  30. $2,500
  31. 9,000
  32. 1,000
  33. 4,000
  34. 200
  35. Her AGI is:
  36. *e. $37,800.
  37. For individuals who are employees, which of the following is correct?
  38. *c. Some deductions may be classified as deductions for AGI and
  39. some may be classified as deductions from AGI.
  40. Which of the following is a deduction from AGI (itemized deduction)?
  41. *c. Safe deposit box rental fee in which stock certificates are
  42. stored.
  43. Which of the following is correct?
  44. *d. Only a. and b. are correct.
  45. Which of the following are deductions for AGI?
  46. *c. Mortgage interest on a building used in a business.
  47. Which of the following is incorrect?
  48. *b. The expenses associated with royalty property are a deduction
  49. from AGI.
  50. Which of the following is not a “trade or business” expense?
  51. *c. Parking ticket paid on business auto.
  52. Which of the following cannot be deducted as a § 162 business expense?
  53. *e. a., b., and c. cannot.
  54. Agnes is the sole shareholder of Violet, Inc. For 2011, she receives
  55. from Violet a salary of $200,000 and dividends of $100,000. Violet’s
  56. taxable income for 2011 is $500,000. On audit, the IRS treats $50,000
  57. of Agnes’s salary as unreasonable. Which of the following statements is
  58. the IRS adjustment.
  59. the IRS adjustment.
  60. *d. Violet’s taxable income will increase by $50,000 as a result
  61. of the IRS adjustment.
  62. Which of the following is incorrect?
  63. *a. All salaries of a business are deductible.
  64. necessary.
  65. reported on Schedule C.
  66. Benita incurred a business expense on December 10, 2011, which she
  67. which included the charge on January 5, 2012. Which of the following is
  68. *b. If Benita is an accrual method taxpayer, she can deduct the
  69. the expense in either 2011 or 2012.
  70. Payments by a cash basis taxpayer of capital expenditures:
  71. is acquired.
  72. *c. Must be deducted over the actual or statutory life of the
  73. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach
  74. to calculate the reserve for bad debts. During 2011, the following
  75. occur associated with bad debts.Credit sales
  76. Collections on credit sales
  77. Amount added to the reserve
  78. Beginning balance in the reserve
  79. Identifiable bad debts during 2011
  80. $325,000
  81. 290,000
  82. 15,000
  83. –0–
  84. 12,000
  85. The amount of the deduction for bad debt expense for Petal for 2011 is:
  86. *a. $12,000.
  87. Which of the following is deductible as a trade or business expense?
  88. fund.
  89. weight and speeding.
  90. *e. None of the above.
  91. Rex, a cash basis calendar year taxpayer, runs a bingo operation which
  92. is illegal under state law. During 2011, a bill designated H.R. 9 is
  93. introduced into the state legislature which, if enacted, would
  94. legitimize bingo games. In 2011, Rex had the following expenses:
  95. Operating expenses in conducting bingo games
  96. Payoff money to state and local police
  97. Newspaper ads supporting H.R. 9
  98. Political contributions to legislators who support H.R. 9
  99. $247,000
  100. 24,000
  101. 3,000
  102. 8,000
  103. Of these expenditures, Rex may deduct:
  104. *a. $247,000.
  105. Angela, a real estate broker, had the following income and expenses inher business:
  106. Commissions income
  107. Expenses:
  108. Commissions paid to non-brokers for referrals
  109. (illegal under state law and subject to criminal penalties)
  110. Commissions paid to other real estate brokers for referrals
  111. (not illegal under state law)
  112. Travel and transportation
  113. Supplies
  114. Office and phone
  115. Parking tickets
  116. $100,000
  117. 20,000
  118. 10,000
  119. 12,000
  120. 4,000
  121. 5,000
  122. 500
  123. How much net income must Angela report from this business?
  124. *e. $69,000.
  125. Gerald owns an illegal casino. Which of the following expenses incurred
  126. in connection with this activity are deductible?
  127. *a. Rent.
  128. Terry and Jim are both involved in operating illegal businesses. Terry
  129. operates a gambling business and Jim operates a drug running business.
  130. Both businesses have gross revenues of $500,000. The businesses incur
  131. the following expenses.
  132. Employee salaries
  133. Bribes to police
  134. Rent and utilities
  135. Cost of goods sold
  136. Terry
  137. $200,000
  138. 25,000
  139. 50,000
  140. –0–
  141. Jim
  142. $200,000
  143. 25,000
  144. 50,000
  145. 125,000
  146. Which of the following statements is correct?
  147. *b. Terry should report profit from his business of $250,000.
  148. Tom operates an illegal drug-running operation and incurred the
  149. following expenses:
  150. Salaries
  151. Illegal kickbacks
  152. Bribes to border guards
  153. Cost of goods sold
  154. Rent
  155. Interest
  156. Insurance on furniture and fixtures
  157. Utilities and telephone
  158. $ 75,000
  159. 20,000
  160. 25,000
  161. 160,000
  162. 8,000
  163. 10,000
  164. 6,000
  165. 20,000
  166. Which of the above amounts reduces his taxable income?
  167. *b. $160,000.
  168. Vera is the CEO of Brunettes, a publicly held corporation. For the
  169. year, she receives a salary of $900,000, a bonus of $500,000, and
  170. paying job with a competitor. What amount may Brunettes deduct?
  171. *b. $1,042,000.
  172. Tommy, an automobile mechanic employed by an auto dealership, is
  173. *e. Not deductible.711. CHAPTER 6—DEDUCTIONS AND LOSSES: IN GENERAL Question MC #25
  174. Iris, a calendar year cash basis taxpayer, owns and operates several TV
  175. rental outlets in Florida, and wants to expand to other states. During
  176. 2011, she spends $14,000 to investigate TV rental stores in South
  177. Carolina and $9,000 to investigate TV rental stores in Georgia. She
  178. As to these expenses, Iris should:
  179. *b. Expense $23,000 for 2011.
  180. Which of the following statements is correct in connection with the
  181. investigation of a business?
  182. *b. If the business is acquired, the expenses may be deducted
  183. immediately by a taxpayer engaged in a similar trade or business.
  184. trade or business, the expenses must be capitalized and amortized.
  185. Which of the following is relevant in deciding whether an activity is
  186. profit-seeking or a hobby?
  187. *e. All of the above factors are to be considered.
  188. For an activity classified as a hobby, the expenses are categorized as
  189. follows:
  190. (1)
  191. Amounts that affect adjusted basis and would be deductible
  192. under other Code sections if the activity had been engaged in for
  193. profit (e.g., depreciation, amortization, and depletion).
  194. (2)
  195. Amounts deductible under other Code sections without regard to
  196. the nature of the activity, such as property taxes and home mortgage
  197. interest.
  198. (3)
  199. Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect
  200. If these expenses exceed the gross income from the activity and are
  201. thus limited, the sequence in which they are deductible is:
  202. *c. (2), (3), (1).
  203. Priscella pursued a hobby of making bedspreads in her spare time. Her
  204. AGI before considering the hobby is $40,000. During the year she sold
  205. the bedspreads for $10,000. She incurred expenses as follows:
  206. Supplies
  207. Interest on loan to get business started
  208. Advertising
  209. $4,000
  210. 500
  211. 6,500
  212. Assuming that the activity is deemed a hobby, how should she report
  213. these items on her tax return?
  214. *c. Include $10,000 in income, deduct nothing for AGI, and claim
  215. $10,000 of the expenses as itemized deductions.
  216. Cory incurred and paid the following expenses:
  217. Tax return preparation fee
  218. Moving expenses
  219. Investment expenses
  220. Expenses associated with rental property
  221. Interest expense associated with loan to finance tax-exempt bonds
  222. $ 600
  223. 2,000
  224. 500
  225. 1,500
  226. 400
  227. Calculate the amount that Cory can deduct (before any percentage
  228. limitations).
  229. *b. $4,600.
  230. Which of the following is not deductible?
  231. *d. Allowable hobby expenses in excess of hobby income.
  232. Which of the following statements is correct?
  233. rent income is not included in gross income and no expenses can
  234. rent income must be included in gross income and all the related
  235. *c. If a personal residence is rented for more than 14 days and
  236. the personal use days exceed 14 days and 10% of the rental days,
  237. the rent income must be included in gross income, but the expense
  238. Robyn rents her beach house for 60 days and uses it for personal use
  239. for 30 days during the year. The rental income is $6,000 and the
  240. Mortgage interest
  241. Real estate taxes
  242. Utilities
  243. Maintenance
  244. Insurance
  245. Depreciation (rental part)
  246. $9,000
  247. 3,000
  248. 2,000
  249. 1,000
  250. 500
  251. 4,000
  252. Using the IRS approach, total expenses that Robyn can deduct on her tax
  253. return associated with the beach house are:
  254. *d. $12,000.
  255. which of the following statements is correct?
  256. *e. a., b., and c. are correct.
  257. Bob and April own a house at the beach. The house was rented to
  258. unrelated parties for 8 weeks during the year. April and the children
  259. used the house 12 days for their vacation during the year. After
  260. properly dividing the expenses between rental and personal use, it was
  261. Gross rental income
  262. Less: Mortgage interest and property taxes
  263. Other allocated expenses
  264. Net rental loss
  265. $4,000
  266. $3,500
  267. 2,000
  268. (5,500)
  269. ($1,500)
  270. What is the correct treatment of the rental income and expenses on Bob
  271. IRS approach is used if applicable?
  272. *a. A $1,500 loss should be reported.
  273. property taxes) are limited to the gross rental income in excess
  274. of deductions for interest and taxes allocated to the rental use.
  275. April, all expenses allocated to personal use may be deducted.
  276. related to the beach house in their current year income tax
  277. return.
  278. Because Scott is three months delinquent on the mortgage payments for
  279. his personal residence, Jeanette (his sister) is going to cover the
  280. mortgage company, Jeanette can deduct the interest part.
  281. nor Jeanette can deduct the interest part.
  282. Melanie incurred the following expenses for her dependent son during
  283. the current year:
  284. Payment of principal on son’s automobile loan
  285. Payment of interest on above loan
  286. Payment of son’s property taxes
  287. Payment of principal on son’s personal residence loan
  288. Payment of interest on son’s personal residence loan
  289. $3,600
  290. 2,500
  291. 1,800
  292. 2,800
  293. 6,000
  294. How much may Melanie deduct in computing her itemized deductions?
  295. *a. $0.
  296. Velma and Josh divorced. Velma’s attorney fee of $4,000 is allocated as
  297. follows:
  298. General representation in obtaining the divorce
  299. Services in obtaining custody of the child
  300. Services in settlement of martial property
  301. Determining the tax consequences of:
  302. Dependency deduction for child
  303. Property settlement
  304. $1,200
  305. 800
  306. 900
  307. 600
  308. 500
  309. Of the $4,000 Velma pays to her attorney, the amount she may deduct as
  310. *b. $1,100.
  311. Which of the following must be capitalized by a business?
  312. On January 2, 2011, Fran acquires a business from Chuck. Among the
  313. remaining life, a covenant not to compete for 10 years, and goodwill.
  314. Of the purchase price, $140,000 was paid for the patent and $60,000 for
  315. the covenant. The amount of the excess of the purchase price over the
  316. identifiable assets was $100,000. What is the amount of the
  317. *c. $20,000.
  318. In January, Lance sold stock with a cost basis of $26,000 to his
  319. *d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
  320. Nikeya sells land (adjusted basis of $120,000) to her adult son,
  321. Shamed, for its appraised value of $95,000. Which of the following
  322. statements is correct?
  323. $120,000 adjusted basis).
  324. + $25,000 disallowed loss for Nikeya).
  325. *c. If Shamed subsequently sells the land for $112,000, he has no
  326. recognized gain or loss.
  327. Which of the following is not a related party for constructive
  328. ownership purposes under § 267?
  329. *a. The taxpayer’s cousin.