Exam 22: Deductions and Losses

On August 1 of the current year,Terry refinances her home and borrows $240,000.Terry is required to pay two points on the loan.The loan is secured by the residence and the charging of points is an established business practice in the area.The term of the loan is 20 years,beginning on August 1 of the current year.How much,if any,of the points may Terry deduct in the current year?

Business interest expense is limited for larger businesses.Which of the following statements is not correct with respect to this limitation?

Losses on the sale of property between a taxpayer and his/her more than 50-percent-owned corporation are disallowed.

On December 1,Robert,a cash-method taxpayer,borrows $10,000 from the bank for use in his business.Under the terms of the loan,the bank discounts the loan by $300,paying Robert the $9,700 cash proceeds.If Robert repays the loan next year,he may deduct

Erin,Sarah,and Timmy are equal partners in EST Partnership.Sarah also owns 40% of Elton Corporation.The remaining shareholders of Elton Corporation are: Erin (24%)and Sarah's uncle (36%).What percent ownership does Sarah directly or constructively own in Elton Corporation?

Capital expenditures add to the value,substantially prolong the useful life,or restore the life of the property.

Mark and his brother,Rick,each own farms.Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle.Mark purchases $2,000 of feed and gives Rick one-half of the feed.Mark tells Rick that there is no need to repay him and to consider the feed a gift.Which of the following statements is true?

During the current year,Ivan begins construction of an office building and a hotel.He incurs $10,000 in property taxes during the construction of the office building and $15,000 for the hotel.Which of the following statements is true of the property taxes during the construction period?

Losses on sales of property between a taxpayer and his/her siblings are disallowed.

Expenses incurred in a trade or business generally are deductions for AGI.

A small business uses the accrual method of accounting for its financial statements.It must also use the accrual method for computing taxable income.

To be tax deductible by an accrual-basis taxpayer,an expense must be all of the following except

Donald sells stock with an adjusted basis of $38,000 to his son,Kiefer,for its fair market value of $30,000.Kiefer sells the stock three years later for $32,000.Kiefer will recognize a gain on the subsequent sale of

RollerQueens Inc.,a calendar-year accrual method taxpayer,enters into a contract each September with a cleaning service to clean the arena after each game during the team's October through March season.Under the criteria of the economic performance test,the RollerQueens Inc.'s deduction for cleaning expense

Carole owns 75% of Pet Foods,Inc.As CEO,Carole must travel extensively and does so on the company jet.In addition,she also uses the jet to take several personal vacations.Carole reports the value of the personal use of the jet,$40,000,as additional compensation.Which of the following is true in terms of the corporation?

Brent must substantiate his travel and entertainment expenses.Which of the following is not required for documentation?

Generally,Section 267 requires that the deduction of unpaid (accrued)expenses be deferred until the year in which the related payee recognizes the amount as income.

Tess has started a new part-time business.She is concerned that the IRS will call it a hobby if her return is audited.This first year of business showed a small profit,and she expects it to continue to show modest profits.She would like to take advantage of the three out of five year profit rule to shift the burden of proof to the IRS.Because of the three-year statute of limitations,this will not be possible for the first year of business.

Toby,owner of a cupcake shop in New York,had been considering opening a similar business (i.e.,a cupcake shop)in Phoenix.After spending $6,800 investigating such possibilities in Phoenix,Toby decided against opening the store on July 1.What is the maximum amount of deduction for the current year attributable to these expenditures?

Assume Congress wishes to encourage healthy eating and is considering a deduction for broccoli purchases.In order to maximize the value of this tax deduction for taxpayers,Congress should provide for a(n)