Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2017 by buying $65,000 worth of supplies for his business on December 27, 2017. The supplies will be used up in 2018.
a. Can Aubry deduct the expenditure for 2017?
Answer: No, because he was motivated by tax considerations.
Although the cash basis taxpayer must have actually or constructively paid the expense, payment does not ensure a current deduction. The Tax Court and the IRS took the position that an asset that
Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2017 by buying $65,000 worth of supplies for his business on December 27, 2017. The supplies will be used up in 2018.
b. If Aubry had bought the supplies because the
Answer: Yes, because there is a business reason.
The taxpayer must also demonstrate that allowing the current deduction will not result in a material distortion of income. Generally, the deduction will be allowed if the item is recurring or was made for a
Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret's interest payments on the
Answer: $0.
Certain income, such as interest on municipal bonds, is tax-exempt. The law also allows the taxpayer to deduct expenses incurred for the production of income. Deduction disallowance provisions, however, make it impossible to make money at the
Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret's interest payments on the
Answer: $0.
The Code specifically disallows as a deduction the expenses of producing tax-exempt income. Interest on any indebtedness incurred or continued to purchase or carry tax-exempt obligations also is disallowed.
None of Jarret's interest payments o
Falcon, Inc., paid salaries of $500,000 to its employees during its first year of operations. At the end of the year, Falcon had additional unpaid salaries of $45,000.
a. Calculate the salary deduction if Falcon is a cash basis taxpayer.
Answer: $500,000.
The expenses of cash-basis taxpayers are deductible only when they are actually paid. If the expense is for a period longer than one year, the deduction will be allowed if the item is recurring or was made for a business purpose rather t
Falcon, Inc., paid salaries of $500,000 to its employees during its first year of operations. At the end of the year, Falcon had additional unpaid salaries of $45,000.
Answer: $545,000.
A deduction for the accrual-basis taxpayer cannot be claimed until (1) all the events have occurred to create the taxpayer's liability, and (2) the amount of the liability can be determined with reasonable accuracy. Once these requiremen
Falcon, Inc., paid salaries of $774,400 to its employees during its first year of operations. At the end of the year, Falcon had additional unpaid salaries of $77,440.
a. Calculate the salary deduction if Falcon is a cash basis taxpayer.
Answer: $774,400.
The expenses of cash-basis taxpayers are deductible only when they are actually paid. If the expense is for a period longer than one year, the deduction will be allowed if the item is recurring or was made for a business purpose rather t
Falcon, Inc., paid salaries of $774,400 to its employees during its first year of operations. At the end of the year, Falcon had additional unpaid salaries of $77,440.
b. Calculate the salary deduction if Falcon is an accrual basis taxpayer.
Answer: $851,840.
A deduction for the accrual-basis taxpayer cannot be claimed until (1) all the events have occurred to create the taxpayer's liability, and (2) the amount of the liability can be determined with reasonable accuracy. Once these requiremen
Amos is a self-employed tax attorney. He and Monica, his employee, attend a conference in Dallas sponsored by the American Institute of CPAs. The following expenses are incurred during the trip:
Amos Monica
Conference registration $900 $900
Airfare 1,200
Answer: deductible for AGI.
It is important to classify deductible expenses as deductions for adjusted gross income (AGI) or deductions from adjusted gross income. Deductions for AGI can be claimed whether or not the taxpayer itemizes. Deductions from AGI
Amos is a self-employed tax attorney. He and Monica, his employee, attend a conference in Dallas sponsored by the American Institute of CPAs. The following expenses are incurred during the trip:
Amos Monica
Conference registration $900 $900
Airfare 1,200
Conference registration $
1,800
Airline tickets
1,900
Taxi fares
100
Lodging
1,050
Total $
4,850
Trevor, a friend of yours from high school, works as a server at the ST Caf�. He asks you to help him prepare his Federal income tax return. When you inquire about why his bank deposits substantially exceed his tip income, he confides to you that he is a
Answers: $52,000; $8,000; $29,000; $0; $37,000; $15,000.
The usual expenses of operating an illegal business (e.g., a numbers racket) are deductible. However, � 162 disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other
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Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2017:
Salary from job $90,000
Alimony received from ex-wife 10,000
Medical expenses 8,000
Based on this information, Sammy has:
a. Deduction for medical
Sammy's AGI is calculated as follows:
Salary from job $ 90,000
Alimony received from ex-wife 10,000
AGI $100,000
Sammy's deduction for medical expenses, an itemized deduction, is $0 [$8,000 - 10%($100,000)].
Which of the following can be claimed as a deduction for AGI?
a. Property taxes on personal use real estate.
b. Medical expenses.
c. Personal casualty losses.
d. Investment interest expenses.
e. None of these choices are correct.
e. None of these choices are correct.
All can be itemized deductions
Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:
Alimony $20,000
Charitable contributions 4,000
Contribution to a traditional IRA 5,500
Expenses paid on rental property 7,500
Interest on home mortgage and pro
c. $107,000.
Al's AGI is calculated as follows:
Gross income $140,000
Deductions for AGI:
Alimony $20,000
IRA 5,500
Expenses on rental property 7,500 (33,000)
AGI $107,000
Marsha is single, had gross income of $50,000, and incurred the following expenses:
Charitable contribution $2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 3,000
Penalty on early withdrawal of savings 25
b. $49,750.
Marsha's AGI is calculated as follows:
Gross income $50,000
Deductions for AGI:
Penalty on early withdrawal of savings (250)
AGI $49,750
Which of the following is incorrect?
a. Property taxes on taxpayer's personal residence are a deduction from AGI
b. Contributions to a traditional IRA are a deduction for AGI.
c. Alimony is a deduction for AGI.
d. The expenses associated with royalty prop
d. The expenses associated with royalty property are a deduction from AGI.
Which of the following is not a "trade or business" expense?
a. Property taxes on business property.
b. Parking ticket paid on business auto.
c. Interest on business indebtedness.
d. Depreciation on business property.
e. All of these choices are "trade or
b. Parking ticket paid on business auto.
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Which of the following are deductions for AGI?
a. Fines and penalties incurred in a trade or business.
b. Mortgage interest on a building used in a business.
c. Property taxes on a personal residence.
d. Mortgage interest on a personal residenc
b. Mortgage interest on a building used in a business.
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Which of the following is correct?
a. Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
b. An expense associated with rental property is classified as a deduction for AGI.
c. A pe
e. "A personal casualty loss is classified as a deduction from AGI", "Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI", and "An expense associated with rental property is classified as a deduction for AGI", are c
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Trade and business expenses should be treated as:
a. Deductible for AGI.
b. A deduction from AGI not subject to the 2%-of-AGI-of-AGI floor.
c. An itemized deduction if not reimbursed.
d. A deduction from AGI subject to the 2%-of-AGI floor.
e. N
a. Deductible for AGI.
Which of the following is a deduction for AGI?
a. Property tax on personal residence.
b. Safe deposit box rental fee in which stock certificates are stored.
c. Roof repairs to a personal use home.
d. Contribution to a traditional IRA.
e. All of these choi
d. Contribution to a traditional IRA.
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Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2017, the following occur associated with bad debts.
Credit sales $400,000
Collections on credit sales 250,000
Amount added t
d. $12,000.
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Andrew, who operates a laundry business, incurred the following expenses during the year.
? Parking ticket of $250 for one of his delivery vans that parked illegally.
? Parking ticket of $75 when he parked illegally while attending a rock conce
b. $0
None of these expenses are deductible. The $75 parking ticket, the $500 DUI ticket, and the $600 attorney fee are all personal expenses. The $250 parking ticket, although related to his laundry business, is not deductible because it is a violation o
Which of the following is a required test for the deduction of a business expense?
a. Necessary
b. Reasonable
c. Ordinary
d. All of these choices are correct.
e. None of these choices are correct.
d. All of these choices are correct.
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Which of the following may be deductible?
a. Interest on a loan used in a hobby.
b. Fines paid for violations of the law.
c. Bribes that relate to a U.S. business.
d. All of these choices are correct.
e. None of these choices are correct.
a. Interest on a loan used in a hobby.
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Which of the following legal expenses are deductible for AGI?
a. Incurred in connection with a trade or business.
b. Incurred in connection with rental or royalty property held for the production of income.
c. Incurred for tax advice relative t
d. Only "Incurred in connection with a trade or business" and "Incurred in connection with rental or royalty property held for the production of income" qualify.
Paula is the sole shareholder of Violet, Inc. For 2017, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2017 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of th
e. None of these choices are correct.
Payments by a cash basis taxpayer of capital expenditures:
a. Must be expensed at the time of payment.
b. Must be expensed by the end of the first year after the asset is acquired.
c. Must be deducted over the actual or statutory life of the asset.
d. Can
c. Must be deducted over the actual or statutory life of the asset.
Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2017, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2017, Rex had the followi
a. $247,000.
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Benita incurred a business expense on December 10, 2017, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2018. Which of the following is correct?
a. If Benita is an accrual m
a. If Benita is an accrual method taxpayer, she can deduct the expense in 2017.
During 2016, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2017. What is the amount of the deduction for salary expense
a. If Silver uses the accrual method, $195,000 in 2016 and $0 in 2017.