Tax Chapter 6 True/False

Flashcard maker : Lily Taylor
False
Deductions are allowed unless a specific provision in the tax law provides otherwise.
True
Mitch is in the 28% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
False
Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI.
True
Only some employment related expenses are classified as deductions for AGI.
True
Section 212 expenses that are related to rent and royalty income are deductions for AGI.
False
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.
True
Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.
True
The Code does not specifically define what constitutes a trade or business.
True
An expense need not be recurring in order to be “ordinary.”
False
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.
True
The portion of a shareholder-employee’s salary that is classified as unreasonable has no effect on the amount of a shareholder-employee’s gross income, but results in an increase in the taxable income of the corporation.
False
Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.
False
Only under limited circumstances can a loss on the sale of a personal use asset be deducted.
True
The income of a sole proprietorship are reported on Schedule C (Profit or Loss from Business).
False
The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.
False
A taxpayer’s note or promise to pay satisfies the “actually paid” requirement for the cash basis method of accounting.
True
Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the other.
True
Under the “one-year rule” for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.
False
None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.
True
The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
False
The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.
True
All domestic bribes (i.e., to a U.S. official) are disallowed as deductions.
False
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.
False
Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 “grease” payment to a U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan’s employer.
False
The cost of legal advice associated with the preparation of an individual’s Federal income tax return is not deductible because it is a personal expense.
True
Two-thirds of treble damage payments under the antitrust law are not deductible.
True
The legal cost of having a will prepared is not deductible.
False
Legal expenses incurred in connection with rental property are deductions from AGI.
False
Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.
False
If a taxpayer operates an illegal business, no deductions are permitted.
True
Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income.
False
Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S. citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible, while that by Jacques is not.
True
A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.
False
For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.
True
Investigation of a business unrelated to one’s present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.
False
In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business.
False
If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.
True
If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.
True
A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.
True
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.
False
Hobby activity expenses are deductible from AGI to the extent of hobby income. Such expenses not in excess of hobby income are not subject to the 2% of AGI floor.
True
Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.
True
If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.
False
If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.
False
If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related expenses can be deducted.
True
The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
False
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.
False
A vacation home at the beach which is rented for 200 days and used personally for 16 days is classified in the personal/rental use category.
False
If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.
False
Beulah’s personal residence has an adjusted basis of $450,000 and a fair market value of $390,000. Beulah converts the property to rental use on November 1, 2014. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.
False
Walt wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them.
False
LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year.
False
Purchased goodwill must be capitalized, but can be amortized over a 60-month period.
False
Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge’s recognized loss is $5,000 and Jason’s adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge).
False
For purposes of the § 267 loss disallowance provision, a taxpayer’s aunt is a related party.

Get instant access to
all materials

Become a Member