Exam 6: Deductions and Losses: in General

Can a trade or business expense be deductible if it is necessary but not ordinary?

A salary that is classified as unreasonable by the IRS is disallowed as a deduction to the corporation.

Under the "one-year rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business.

Payments by a cash basis taxpayer of capital expenditures:

Mattie and Elmer are separated and are in the process of obtaining a divorce.They incur legal fees for their respective attorneys with the expenses being itemized as follows: Although there is no requirement that he do so, Elmer pays Mattie's lawyer as a gesture of the positive feelings he still has for her.

A political contribution to the Democratic Party or the Republican Party is not deductible, but a contribution to the Presidential Election Campaign Fund is deductible.

Under no circumstance can a loss on the sale of a personal use asset be deducted.

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

All employment related expenses are classified as deductions for AGI.

Bridgett's son, Hubert, is $10,000 in arrears on his residential mortgage payments.Of the $10,000, $7,500 represents interest and $2,500 represents principal.

Ralph wants to give his daughter $1,000 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he cannot deduct them.

LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building.The gross receipts of the partnership are less than $100,000.LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year.

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

Velma and Josh divorced. Velma's attorney fee of $4,000 is allocated as follows: Of the $4,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is:

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

The expenses incurred to investigate the expansion of an existing business are deductible even if the expansion is not accomplished.

Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.

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

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.