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Exam 5: Business Deductions

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Question 81

Multiple Choice

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On December 31, 2018, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer.Charles is president and sole shareholder of the corporation.When can Peregrine deduct the bonus?

A) In 2018, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2019.
B) In 2019, if payment was made at any time during that year.
C) In 2018, if payment was made on or before April 15, 2019.
D) In 2019, but only if payment was made on or before April 15, 2019.
E) None of the above.

F) A) and D)
G) C) and E)

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Question 82

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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:

A) A deduction for AGI.
B) A deduction from AGI, subject to the 2 percent floor.
C) A deduction from AGI, not subject to the 2 percent floor.
D) Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
E) Not deductible.

F) C) and D)
G) A) and B)

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Question 83

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On March 1, 2018, Lana leases and places in service a passenger automobile.The lease will run for five years and the payments are $500 per month.During 2018, she uses her car 60% for business and 40% for personal activities.Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana's gross income attributable to the lease.

Jenna acquires a new seven-year class asset on September 20, 2018, for $80,000.She placed the asset in service on October 5, 2018.She does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery.She takes additional first-year depreciation.She sells the asset on August 25, 2019.This is the only asset she acquires in 2018.Determine Jenna's cost recovery in 2018 and 2019.

Purchased goodwill must be capitalized, but can be amortized over a 60-month period.

In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered?

Cora purchased a hotel building on May 17, 2018, for $3,000,000.Determine the cost recovery deduction for 2019.

Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other.Craig owns 35% of the stock, and Oscar owns the remaining 65%.During 2018, Ivory paid a salary of $100,000 to each shareholder.On December 31, 2018, Ivory accrued a bonus of $25,000 to each shareholder.Assuming that the bonuses are paid to the shareholders on February 1, 2019, compute Ivory Corporation's 2018 deduction for the above amounts.

Motel buildings have a cost recovery period of 27.5 years.

Indigo Company acquires a new machine 5-year MACRS property) on February 2, 2018 at a cost of $100,000.On November 18, 2018, Indigo also acquires office equipment 7-year MACRS property) at a cost of $50,000.Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation.What is Indigo's total MACRS deduction for 2018?

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?

Orange Corporation begins business on April 2, 2018.The corporation reports startup expenditures of $64,000 all incurred last year.Determine the total amount that Orange can elect to deduct in 2018.

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.

The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.

How is the limitation on the deduction of business interest computed? Does it apply to all taxpayers? What happens to any business interest deduction disallowed by the limitation?

MACRS does not use salvage value.As a result, if a 7-year MACRS asset is held for 10 years, its adjusted basis will be zero.

Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.

Adrian is the president and sole shareholder of Pigeon Corporation.He also lends money and rents a building to the corporation.Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation.What limitations are there on the use of such relationships?

On August 20, 2018, May placed in service a building for her business.On November 28, 2018, May paid $80,000 for improvements to the building.What is May's cost recovery deduction for the building improvements in 2018?