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Exam 6: Deductions and Losses: in General

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Question 1

Multiple Choice

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Priscella pursued a hobby of making bedspreads in her spare time.Her AGI before considering the hobby is $40,000.During the year she sold the bedspreads for $10,000.She incurred expenses as follows: Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

A) Include $10,000 in income and deduct $11,000 for AGI.
B) Ignore both income and expenses since hobby losses are disallowed.
C) Include $10,000 in income, deduct nothing for AGI, and claim $10,000 of the expenses as itemized deductions.
D) Include $10,000 in income and deduct interest of $500 for AGI.
E) None of the above.

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

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Question 2

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

A) True
B) False

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Question 3

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Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft.One negotiation is with a U.S.assistant secretary of defense.She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table.Another negotiation is with the minister of defense of a third world country.To complete the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment.Beige makes the payments and closes the deals.How much of these payments are deductible by Beige, Inc.?

Larry, a calendar year cash basis taxpayer, has the following transactions: Based on this information, Larry has:

The ordinary and necessary expenses for operating an illegal gambling operation (excluding such items as fines, bribes, and other illegal payments) are deductible.

Landscaping expenditures on new rental property are deductible in the year they are paid or incurred.

If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense.

Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct?

Rose's business sells air conditioners which have a one-year warranty.Based on historical data, the warranty costs amount to 14% of sales.During 2012, air conditioner sales are $300,000.Actual warranty expenses paid in 2012 are $37,000.

The income of a sole proprietorship are reported on Schedule C (Profit or Loss from Business).

What losses are deductible by an individual taxpayer?

On January 2, 2012, Fran acquires a business from Chuck.Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant.The amount of the excess of the purchase price over the identifiable assets was $100,000.What is the amount of the amortization deduction for 2012?

A football team that pays a star player an annual salary of $20 million can deduct the entire $20 million as salary expense.If the same amount is paid to the CEO of IBM, only $1 million is deductible.

Which of the following statements is correct in connection with the investigation of a business?

The only § 212 expenses that are deductions for AGI are those related to rent and royalty income.

Alice incurs qualified moving expenses of $12,000.If she is reimbursed by her employer, the deduction is classified as a deduction for AGI.If not reimbursed, the deduction is classified as an itemized deduction.

Emelie and Taylor are employed by the Federal government and own their home in Washington, D.C.While vacationing in the summer for three weeks, they rent their home for two weeks to an Angolian diplomat for $3,000.During the third week, they permit Taylor's aunt and uncle to stay in the house with no rent being charged.Expenses associated with the home for the year are as follows: Determine the effect of these income and expense items associated with their home if they file a joint return.

Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI.

Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother, Shirley, for $160,000.Walter reinvests the proceeds in the stock market.Shirley holds the land for one year and a day and sells it in the marketplace for $169,000.

During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?