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Exam 6: Deductions and Losses: in General

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Question 81

True/False

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

A) True
B) False

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Question 82

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Which of the following is a required test for the deduction of a business expense?

A) Ordinary
B) Necessary
C) Reasonable
D) All of the above
E) None of the above

F) B) and C)
G) A) and E)

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Question 83

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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.

Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:

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?

Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To provide Olive with funds to acquire additional working capital, the shareholders each loan Olive $100,000 with a 6% interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

Which of the following are deductions for AGI?

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, 2017. 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, 2017. How much can Taylor deduct as rent expense for 2017?

Which of the following is incorrect?

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.

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary. The IRS classifies $100,000 of this amount as unreasonable compensation. The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.

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

During the year, Rita rented her vacation home for twelve days for $2,400 and she used it personally for three months. The following expenses were incurred on the home: ​ Calculate her rental gain or loss and itemized deductions.