In preparing his 2011 Federal income tax return, Sam, who is not
married and using single filing status, incorrectly claimed alimony
payments of $12,000 as an itemized deduction (rather than as a
$20,000. Which of the following statements is correct?
overstated or understated.
*d. The error will have no effect on taxable income.
Trade and business expenses should be treated as:
*c. Deductible
Paul is single, age 63, and has gross income of $70,000. His deductible
Alimony
Charitable contributions
Contribution to a traditional IRA
Expenses paid on rental property
Interest on home mortgage and property taxes on personal residence
State income tax
What is Paul’s AGI?
$15,000
2,000
5,000
7,500
6,800
2,200*b. $42,500.
Janice is single, had gross income of $38,000, and incurred the
following expenses:
Charitable contribution
Taxes and interest on home
Legal fees incurred in a tax dispute
Medical expenses
Penalty on early withdrawal of savings
$2,500
9,000
1,000
4,000
200
Her AGI is:
*e. $37,800.
For individuals who are employees, which of the following is correct?
*c. Some deductions may be classified as deductions for AGI and
some may be classified as deductions from AGI.
Which of the following is a deduction from AGI (itemized deduction)?
*c. Safe deposit box rental fee in which stock certificates are
stored.
Which of the following is correct?
*d. Only a. and b. are correct.
Which of the following are deductions for AGI?
*c. Mortgage interest on a building used in a business.
Which of the following is incorrect?
*b. The expenses associated with royalty property are a deduction
from AGI.
Which of the following is not a “trade or business” expense?
*c. Parking ticket paid on business auto.
Which of the following cannot be deducted as a § 162 business expense?
*e. a., b., and c. cannot.
Agnes is the sole shareholder of Violet, Inc. For 2011, she receives
from Violet a salary of $200,000 and dividends of $100,000. Violet’s
taxable income for 2011 is $500,000. On audit, the IRS treats $50,000
of Agnes’s salary as unreasonable. Which of the following statements is
the IRS adjustment.
the IRS adjustment.
*d. Violet’s taxable income will increase by $50,000 as a result
of the IRS adjustment.
Which of the following is incorrect?
*a. All salaries of a business are deductible.
necessary.
reported on Schedule C.
Benita incurred a business expense on December 10, 2011, which she
which included the charge on January 5, 2012. Which of the following is
*b. If Benita is an accrual method taxpayer, she can deduct the
the expense in either 2011 or 2012.
Payments by a cash basis taxpayer of capital expenditures:
is acquired.
*c. Must be deducted over the actual or statutory life of the
Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach
to calculate the reserve for bad debts. During 2011, the following
occur associated with bad debts.Credit sales
Collections on credit sales
Amount added to the reserve
Beginning balance in the reserve
Identifiable bad debts during 2011
$325,000
290,000
15,000
–0–
12,000
The amount of the deduction for bad debt expense for Petal for 2011 is:
*a. $12,000.
Which of the following is deductible as a trade or business expense?
fund.
weight and speeding.
*e. None of the above.
Rex, a cash basis calendar year taxpayer, runs a bingo operation which
is illegal under state law. During 2011, a bill designated H.R. 9 is
introduced into the state legislature which, if enacted, would
legitimize bingo games. In 2011, Rex had the following expenses:
Operating expenses in conducting bingo games
Payoff money to state and local police
Newspaper ads supporting H.R. 9
Political contributions to legislators who support H.R. 9
$247,000
24,000
3,000
8,000
Of these expenditures, Rex may deduct:
*a. $247,000.
Angela, a real estate broker, had the following income and expenses inher business:
Commissions income
Expenses:
Commissions paid to non-brokers for referrals
(illegal under state law and subject to criminal penalties)
Commissions paid to other real estate brokers for referrals
(not illegal under state law)
Travel and transportation
Supplies
Office and phone
Parking tickets
$100,000
20,000
10,000
12,000
4,000
5,000
500
How much net income must Angela report from this business?
*e. $69,000.
Gerald owns an illegal casino. Which of the following expenses incurred
in connection with this activity are deductible?
*a. Rent.
Terry and Jim are both involved in operating illegal businesses. Terry
operates a gambling business and Jim operates a drug running business.
Both businesses have gross revenues of $500,000. The businesses incur
the following expenses.
Employee salaries
Bribes to police
Rent and utilities
Cost of goods sold
Terry
$200,000
25,000
50,000
–0–
Jim
$200,000
25,000
50,000
125,000
Which of the following statements is correct?
*b. Terry should report profit from his business of $250,000.
Tom operates an illegal drug-running operation and incurred the
following expenses:
Salaries
Illegal kickbacks
Bribes to border guards
Cost of goods sold
Rent
Interest
Insurance on furniture and fixtures
Utilities and telephone
$ 75,000
20,000
25,000
160,000
8,000
10,000
6,000
20,000
Which of the above amounts reduces his taxable income?
*b. $160,000.
Vera is the CEO of Brunettes, a publicly held corporation. For the
year, she receives a salary of $900,000, a bonus of $500,000, and
paying job with a competitor. What amount may Brunettes deduct?
*b. $1,042,000.
Tommy, an automobile mechanic employed by an auto dealership, is
*e. Not deductible.711. CHAPTER 6—DEDUCTIONS AND LOSSES: IN GENERAL Question MC #25
Iris, a calendar year cash basis taxpayer, owns and operates several TV
rental outlets in Florida, and wants to expand to other states. During
2011, she spends $14,000 to investigate TV rental stores in South
Carolina and $9,000 to investigate TV rental stores in Georgia. She
As to these expenses, Iris should:
*b. Expense $23,000 for 2011.
Which of the following statements is correct in connection with the
investigation of a business?
*b. If the business is acquired, the expenses may be deducted
immediately by a taxpayer engaged in a similar trade or business.
trade or business, the expenses must be capitalized and amortized.
Which of the following is relevant in deciding whether an activity is
profit-seeking or a hobby?
*e. All of the above factors are to be considered.
For an activity classified as a hobby, the expenses are categorized as
follows:
(1)
Amounts that affect adjusted basis and would be deductible
under other Code sections if the activity had been engaged in for
profit (e.g., depreciation, amortization, and depletion).
(2)
Amounts deductible under other Code sections without regard to
the nature of the activity, such as property taxes and home mortgage
interest.
(3)
Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect
If these expenses exceed the gross income from the activity and are
thus limited, the sequence in which they are deductible is:
*c. (2), (3), (1).
Priscella pursued a hobby of making bedspreads in her spare time. Her
AGI before considering the hobby is $40,000. During the year she sold
the bedspreads for $10,000. She incurred expenses as follows:
Supplies
Interest on loan to get business started
Advertising
$4,000
500
6,500
Assuming that the activity is deemed a hobby, how should she report
these items on her tax return?
*c. Include $10,000 in income, deduct nothing for AGI, and claim
$10,000 of the expenses as itemized deductions.
Cory incurred and paid the following expenses:
Tax return preparation fee
Moving expenses
Investment expenses
Expenses associated with rental property
Interest expense associated with loan to finance tax-exempt bonds
$ 600
2,000
500
1,500
400
Calculate the amount that Cory can deduct (before any percentage
limitations).
*b. $4,600.
Which of the following is not deductible?
*d. Allowable hobby expenses in excess of hobby income.
Which of the following statements is correct?
rent income is not included in gross income and no expenses can
rent income must be included in gross income and all the related
*c. If a personal residence is rented for more than 14 days and
the personal use days exceed 14 days and 10% of the rental days,
the rent income must be included in gross income, but the expense
Robyn rents her beach house for 60 days and uses it for personal use
for 30 days during the year. The rental income is $6,000 and the
Mortgage interest
Real estate taxes
Utilities
Maintenance
Insurance
Depreciation (rental part)
$9,000
3,000
2,000
1,000
500
4,000
Using the IRS approach, total expenses that Robyn can deduct on her tax
return associated with the beach house are:
*d. $12,000.
which of the following statements is correct?
*e. a., b., and c. are correct.
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
Gross rental income
Less: Mortgage interest and property taxes
Other allocated expenses
Net rental loss
$4,000
$3,500
2,000
(5,500)
($1,500)
What is the correct treatment of the rental income and expenses on Bob
IRS approach is used if applicable?
*a. A $1,500 loss should be reported.
property taxes) are limited to the gross rental income in excess
of deductions for interest and taxes allocated to the rental use.
April, all expenses allocated to personal use may be deducted.
related to the beach house in their current year income tax
return.
Because Scott is three months delinquent on the mortgage payments for
his personal residence, Jeanette (his sister) is going to cover the
mortgage company, Jeanette can deduct the interest part.
nor Jeanette can deduct the interest part.
Melanie incurred the following expenses for her dependent son during
the current year:
Payment of principal on son’s automobile loan
Payment of interest on above loan
Payment of son’s property taxes
Payment of principal on son’s personal residence loan
Payment of interest on son’s personal residence loan
$3,600
2,500
1,800
2,800
6,000
How much may Melanie deduct in computing her itemized deductions?
*a. $0.
Velma and Josh divorced. Velma’s attorney fee of $4,000 is allocated as
follows:
General representation in obtaining the divorce
Services in obtaining custody of the child
Services in settlement of martial property
Determining the tax consequences of:
Dependency deduction for child
Property settlement
$1,200
800
900
600
500
Of the $4,000 Velma pays to her attorney, the amount she may deduct as
*b. $1,100.
Which of the following must be capitalized by a business?
On January 2, 2011, Fran acquires a business from Chuck. Among the
remaining life, a covenant not to compete for 10 years, and goodwill.
Of the purchase price, $140,000 was paid for the patent and $60,000 for
the covenant. The amount of the excess of the purchase price over the
identifiable assets was $100,000. What is the amount of the
*c. $20,000.
In January, Lance sold stock with a cost basis of $26,000 to his
*d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
Nikeya sells land (adjusted basis of $120,000) to her adult son,
Shamed, for its appraised value of $95,000. Which of the following
statements is correct?
$120,000 adjusted basis).
+ $25,000 disallowed loss for Nikeya).
*c. If Shamed subsequently sells the land for $112,000, he has no
recognized gain or loss.
Which of the following is not a related party for constructive
ownership purposes under § 267?
*a. The taxpayer’s cousin.