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Exam 5: Business Deductions

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Question 51

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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.

A) True
B) False

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Question 52

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Under the MACRS straight-line election for personalty,only the half-year convention is applicable.

A) True
B) False

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Question 53

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Graham,a CPA,has submitted a proposal to do the annual audit for a municipality.Owen,the city treasurer,tells Graham that for a $1,000 fee,he will use his influence to have the audit awarded to Graham.What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?

On June 1,2015,Sam purchased used farm machinery for $150,000.Sam used the machinery in connection with his farming business.Sam does not elect to expense assets under § 179.Sam has,however,made an election to not have the uniform capitalization rules apply to the farming business.Determine the cost recovery deduction for 2015.

On June 1,2015,Irene places in service a new automobile that cost $21,000.The car is used 70% for business and 30% for personal use.(Assume this percentage is maintained for the life of the car. ) She does not take additional first-year depreciation (if available) .Determine the cost recovery deduction for 2016.

On May 30,2014,Jane purchased a factory building to use for her business.In August 2015,Jane paid $300,000 for improvements to the building.Determine Jane's total deduction with respect to the building improvements for 2015.

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

The only asset Bill purchased during 2015 was a new seven-year class asset.The asset,which was listed property,was acquired on June 17 at a cost of $50,000.The asset was used 40% for business,30% for the production of income,and the rest of the time for personal use.Bill always elects to expense the maximum amount under § 179 whenever it is applicable.The net income from the business before the § 179 deduction is $100,000.Determine Bill's maximum deduction with respect to the property for 2015.

Ordinary and necessary business expenses,other than cost of goods sold,of an illegal drug trafficking business do not reduce taxable income.

Antiques may be eligible for cost recovery if they are used in a trade or business.

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

Land improvements are generally not eligible for cost recovery.

Property used for the production of income is not eligible for § 179 expensing.

If an election is made to defer deduction of research expenditures,the amortization period is based on the expected life of the research project if less than 60 months.

The factor for determining the cost recovery for eligible real estate under MACRS,in the year of disposition,is taken from the month of the disposition.

If an automobile is placed in service in 2015,the limitation for cost recovery in 2017 will be based on the cost recovery limits for the year 2015.

Property which is classified as personalty may be depreciated.

Mary purchased a new five-year class asset on March 7,2015.The asset was listed property (not an automobile) .It was used 60% for business and the rest of the time for personal use.The asset cost $900,000.Mary made the § 179 election.The income from the business before the § 179 deduction was $600,000.Mary also takes additional first-year depreciation (if available) .Determine the total deductions with respect to the asset for 2015.

All listed property is subject to the substantiation requirements of § 274.

On June 1,2015,James places in service a new automobile that cost $40,000.The car is used 60% for business and 40% for personal use.(Assume this percentage is maintained for the life of the car. ) James does not take additional first-year depreciation (if available) .Determine the cost recovery deduction for 2015.