Exam 5: Introduction to Business Expenses

Discuss whether the following persons are currently engaged in a trade or business: a.Darlene has expenses related to managing her portfolio of securities. The trading of the securities generates most of her annual income. She generally does not hold securities long-term. She buys and sells continuously. She has no other job. b.Mark incurs expenses related to investing in stocks and bonds. Mark is a Sociology professor at Indiana University but spends 10-15 hours per week on his investments. Approximately 70% of Mark's annual income come from his investments as dividends and interest. c.Paul leases real estate to Floyd's Barber Shop for a parking lot. The only expense he incurs is legal expense regarding the lease, which he renegotiates annually. d.Mandy owns several rental apartments. She arranges for repairs and maintenance, pays for the expenses related to the properties, and handles all leasing activities.

Kim owns and operates a restaurant on the north side of Indianapolis. She is considering opening a day care center on the south side of town and incurs $10,400 of investigation expenses. In July of the current year, Kim opens the day care center. How much of the investigation expenses can Kim deduct in the current year?

Angela is an accrual basis taxpayer. On September 1 of the current year, she prepays the annual premium of $4,800 for a one-year fire insurance policy on the contents of her business warehouse. The expense is not material for either financial or tax purposes. The prepayment is necessary to activate the insurance coverage and maintain annual renewals. How much may Angela deduct in the current year?

Several factors are used to determine whether an activity is classified as a hobby or as a business. Which of the following are factors that aid in this determination? I.The financial status of the taxpayer II.The expectation that the assets involved in the activity will increase in value. III.The taxpayer's success in similar activities. IV.The amount of personal pleasure and enjoyment that accrues to the taxpayer. ​

Using the general tests for deductibility, explain why the following expenses are not fully deductible. a.Irene spends $1,600 on a trip to Florida to investigate opening up a consulting firm. Irene currently works for a consulting firm. b.Augie and his wife divorce during the current year. Augie pays $3,000 in legal fees related to the divorce. c.Peter owns a hardware store. During the current year, he pays $328,000 to acquire a new warehouse. d.Paul contributes $25 to a fund to be used for advertising to persuade voters to vote against a candidate running for Congress.

If a taxpayer owes interest, economic performance occurs I.with the passage of time. II.when the all-events test is met. III.when payments are made by the taxpayer. ​

Bruce operates an illegal drug business. Which of the following is deductible?