Exam 6: Deductions and Losses: in General

Briefly discuss the disallowance of deductions for capital expenditures.

Hobby activity expenses are deductible from AGI to the extent of hobby income.Such expenses not in excess of hobby income are not subject to the 2% of AGI floor.

Vera is the CEO of Brunettes, a publicly held corporation.For the year, she receives a salary of $800,000, a bonus of $400,000, and contributions to her retirement plan of $45,000.The bonus was awarded at the December board meeting based on Vera's threat to accept a better paying job with a competitor.What amount may Brunettes deduct?

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

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 $0 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 disallowed loss of Marge).

Which of the following is not a "trade or business" expense?

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?

Melba incurred the following expenses for her dependent daughter during the current year: How much may Melba deduct in computing her itemized deductions?

Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month.He commenced his practice on February 1, 2012.In order to guarantee no rent increases during an 18-month period, he signed an 18-month lease and prepaid the $90,000 on February 1, 2012.How much can Taylor deduct as rent expense for 2012?

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Emelie and Taylor are employed by the Federal government and own their home in Washington, D.C.While vacationing in the summer for three weeks, they rent their home for two weeks to an Angolian diplomat for $3,000.During the third week, they permit Taylor's aunt and uncle to stay in the house with no rent being charged.Expenses associated with the home for the year are as follows: Determine the effect of these income and expense items associated with their home if they file a joint return.

Martha rents part of her personal residence in the summer for 3 weeks for $3,000.Anne rents all of her personal residence for one week in December for $2,500.Anne must include the $2,500 in her gross income whereas Martha is not required to include the $3,000 in her gross income.

Rose's business sells air conditioners which have a one-year warranty.Based on historical data, the warranty costs amount to 14% of sales.During 2012, air conditioner sales are $300,000.Actual warranty expenses paid in 2012 are $37,000.

The ordinary and necessary expenses for operating an illegal gambling operation (excluding such items as fines, bribes, and other illegal payments) are deductible.

Are there any circumstances under which lobbying expenditures are deductible?

Al single, age 60, and has gross income of $140,000.His deductible expenses are as follows: What is Al's AGI?

Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI.

Under what circumstance can a bribe be deducted?

Landscaping expenditures on new rental property are deductible in the year they are paid or incurred.

Max opened his dental practice (a sole proprietorship) in March 2012.At the end of the year, he has unpaid accounts receivable of $62,000 and no unpaid accounts payable.Should Max use the accrual method or the cash method for his dental practice?