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Exam 6: Deductions and Losses: in General

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Question 41

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Briefly discuss the disallowance of deductions for capital expenditures.

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Any expenditures that add to t...

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Question 42

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For a vacation home to be classified in the primarily rental use category,what attributes must be present?

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Question 43

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If an item such as property taxes and home mortgage interest exceed the income from a hobby,the excess amount of this item over the hobby income can be deducted if the taxpayer itemizes deductions.

Ruth 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,Ruth and Jeff each receive a total salary of $175,000.This is paid as follows: $10,000 per month and $55,000 on December 31.Determine the amount of the salary deduction.

Which of the following are deductions for AGI?

A salary that is classified as unreasonable by the IRS is disallowed as a deduction to the corporation.

If a vacation home is a personal/rental residence,no maintenance and utility expenses can be claimed as a deduction.

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

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2011,she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia.She acquires the South Carolina operations,but not the outlets in Georgia.As to these expenses,Iris should:

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

During the year,Martin rented his vacation home for three months and spent one month there.Gross rental income from the property was $5,000.Martin incurred the following expenses: mortgage interest,$3,000; real estate taxes,$1,500; utilities,$800; maintenance,$500; and depreciation,$4,000.Compute Martin's allowable deductions for the vacation home. Since the vacation home is rented for 15 or more days and is used for personal purposes for more than the greater of (1)14 days or (2)10% of the rental days,the deductions are scaled down,using the court's approach,as follows: Thus,Martin may deduct $1,125 taxes and interest,$975 utilities and maintenance,and $2,900 depreciation against the gross income of $5,000.The personal portion of taxes and interest ($3,375)is deductible as an itemized deduction.Example 29

For a vacation home to be classified in the personal/rental use category,what attributes must be present?

Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.

Describe the circumstances under which a taxpayer can receive rent income from a personal residence,but does not have to report it as gross income.

Briefly explain the provisions regarding the deductibility of expenditures paid for another's benefit or obligation.

Fines and penalties paid for violations of the law (e.g.,illegal dumping of hazardous waste)are deductible only if they relate to a trade or business.

A bribe paid to a domestic (U.S.)official is not deductible,but it may be possible to deduct a bribe paid to a foreign official.

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?

For an expense to be deducted as ordinary,it must be recurring in nature.

If part of a shareholder/employee's salary is classified as unreasonable,determine the effect on the: