Exam 6: Deductions and Losses: in General

Agnes operates a Christmas Shop in Atlantic City,NJ.She makes a weekend trip to Vero Beach,FL,for the purpose of determining the feasibility of opening another shop.Her travel expenses are $2,000 (includes $500 for meals).In addition,she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study.Determine the amount of the expenses that Agnes can deduct if: a.​ She opens a new shop in Vero Beach. b.She decides not to open a new shop in Vero Beach.

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

Purchased goodwill must be capitalized,but can be amortized over a 60-month period.

If a vacation home is classified as primarily rental use,a deduction for all of the rental expenses is allowed.

On January 2,2015,Fran acquires a business from Chuck.Among the assets purchased are the following intangibles: patent with a 7-year 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 amortization deduction for 2015?

In January,Lance sold stock with a cost basis of $26,000 to his brother,James,for $24,000,the fair market value of the stock on the date of sale.Five months later,James sold the same stock through his broker for $27,000.What is the tax effect of these transactions?

Marvin spends the following amounts on a house he owns: Repair to roof $1,100 Carpeting for the living room 1,200 Painting of the exterior 4,000 Replacement of front door 800 ​ a.How much of these expenses can Marvin deduct if the house is his principal residence? b.How much of these expenses can Marvin deduct if he rents the house to a tenant? c.Classify any deductible expenses as deductions for AGI or as deductions from AGI.

Are all personal expenses disallowed as deductions?

The legal cost of having a will prepared is not deductible.

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.

Petula's business sells heat pumps which have a one-year warranty.Based on historical data,the warranty costs amount to 11% of sales.During 2015,heat pump sales are $400,000.Actual warranty expenses paid in 2015 are $40,000. a.​ Determine the amount of the warranty expense deduction for 2015 if Petula's business uses the accrual method. b.​ ​ How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties which covered the second and third years of ownership?

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

For a vacation home to be classified in the personal/rental use category,what attributes must be present?

Tom operates an illegal drug-running operation and incurred the following expenses: Salaries $ 75,000 Illegal kickbacks 20,000 Bribes to border guards 25,000 Cost of goods sold 160,000 Rent 8,000 Interest 10,000 Insurance on furniture and fixtures 6,000 Utilities and telephone 20,000 Which of the above amounts reduces his taxable income?

Isabella owns two business entities.She may be able to use the cash method for one and the accrual method for the other.

An expense need not be recurring in order to be "ordinary."

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.

What are the relevant factors to be considered in determining whether an activity is profit-seeking or a hobby?

Robin and Jeff own an unincorporated hardware store.They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0.Based on this policy,Robin and Jeff each receive a total salary of $125,000.This is paid as follows: $8,000 per month and $29,000 on December 31.Determine the amount of the salary deduction.

Fines and penalties paid for violations of the law (e.g. ,illegal dumping of hazardous waste) are deductible only if they relate to a trade or business.