Saudi Electronic University

ACCT 422

CH6:

1)Generally, deductions for adjusted gross income on an individual's tax return include all the following types of expenses except those

2. On Form 1040, deductions for adjusted gross income include the amounts paid for all of the following except

3. Deductions for adjusted gross income include all of the following except

4. Self-employed individuals may claim, as a deduction for adjusted gross income, 50 percent of their

5. Charles is a single person, age 35, with no dependents. In 2013, Charles has gross income of

$75,000 from his sole proprietorship. Charles also incurs $80,000 of deductible business expenses in connection with his proprietorship. He has interest and dividend income of $22,000. Charles has no itemized deductions. Charles's taxable income is

6. In 2013, Sean, who is single and age 44, received $55,000 of gross income and had $5,000 of deductions for AGI and $4,600 of itemized deductions. Sean's taxable income is

7. In 2013, Venkat, who is single and age 37, received $60,000 of gross income and had $6,200 of itemized deductions. Venkat's taxable income is

8. Liz, who is single, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year.

Income:

Expenses:

What is her adjusted gross income for the year?

9. Deductions for AGI may be located

1. on the front page of Form 1040.

2. on Schedule C as a deduction.
3. on Schedule E as a deduction.
4. All of the above are true.

10. To be tax deductible, an expense must be all of the following except

11. Which of the following is not required for an expenditure to be deductible as a business or investment expense?

12. Various criteria will disqualify the deduction of a business or investment related expenditure. Which of the following criteria will not disqualify a business or investment expenditure?

13. Maria pays the following legal and accounting fees during the year:

What is the total amount of her for AGI deduction for these fees?

14. Leigh pays the following legal and accounting fees during the year:

What is the total amount of her for AGI deduction for these fees?

15. During the current year, Martin purchases undeveloped land as an investment. Martin intends to rent the land as pastureland and hopefully sell it later for a profit. In the current year, Martin receives no rent but he does pay taxes of $2,800, mortgage interest of $900 and liability insurance of $500. How much of these expenses can Martin deduct (before any limitations) on his current tax return?

16. Pamela was an officer in Green Restaurant which subsequently went bankrupt. Pamela started a new restaurant and, to establish goodwill, paid off the debts of $100,000 of Green Restaurant. She was under no obligation to do so. The $100,000 is

17. Laura, the controlling shareholder and an employee of Southwest Corporation, receives an annual salary of $750,000. Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably-sized corporations, the IRS contends that Laura's salary should be no higher than $600,000. The Court upheld the IRS's position. As a result, which of the following is true?

18. Carole owns 75% of Pet Foods, Inc. As CEO, Carole must travel extensively and does so on the company jet. In addition, she also uses the jet to take several personal vacations. Carole reports the value of the personal use of the jet, $140,000, as additional compensation. Which of the following is true in terms of the corporation?

19. Mark and his brother, Rick, each own farms. Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle. Mark purchases $2,000 of feed and gives Rick one-half of the feed. Mark tells Rick that there is no need to repay him and to consider the feed a gift. Which of the following statements is true?

20. Which of the following factors is important in distinguishing between capital and revenue expenditures?

1. The expenditure improves the property, adding to the value of the property.
2. The expenditure provides a betterment, adding to the value of the property.
3. The expenditure restores the property.
4. All of the above.

21. During 2013 and 2014, Danny pays property taxes of $3,500 each year on a piece of land. During 2013, the land is vacant and unproductive. In 2014, Danny uses the land as a parking lot and generates

$16,000 in income. Which of the following is true regarding the property taxes?

1. Capitalize $3,500 each year.
2. Deduct $3,500 each year.
3. Capitalize $3,500 in 2013 and deduct $3,500 in 2014.
4. Either B or C is acceptable.

22. During the current year, Ivan begins construction of an office building and a hotel. He incurs

$10,000 in property taxes during the construction of the office building and $15,000 for the hotel. Which of the following statements is true of the property taxes during the construction period?

23. Emeril borrows $340,000 to finance taxable and tax-exempt investments. He incurs $18,000 investment interest expense, allocated equally between the taxable and tax-exempt investments. Ignore any possible investment interest expense limitation. How much of the interest expense is deductible, and where is it deductible?

24. Jimmy owns a trucking business. During the current year he incurred the following:

What is the total amount of deductible expenses?

25. During the current year, the United States files criminal and civil actions against Joe, the CEO of Box Corporation, and Jane, the president of Cable Corporation, for price fixing. Both enter pleas of no contest and appropriate judgments are entered. Subsequent to this action, Square Corporation sues both Box and Cable for treble damages of $6,000,000. In settlement, Box and Cable each pay Square

$1,200,000. What is the maximum amount that Box and Cable may each deduct?

26. Troy incurs the following expenses in his business (illegal gambling establishment):

His deductible expenses are

27. Pat, an insurance executive, contributed $1,000,000 to the re-election campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct?

28. American Healthcare (AH), an insurance company, is trying to persuade Congress to enact nationwide anti-smoking legislation. As part of this effort, AH paid $500,000 to hire a lobbying firm to discuss its concerns with members of Congress. AH also contributed $100,000 to candidates for political office who support limiting public smoking. What amount of these expenditures can AH deduct?

29. In March of the current year, Marcus began investigating the possibility of opening a specialty clothing store. From March through June, he spent $2,300 on a market survey, $2,700 in consulting fees to find the best location and $3,600 in professional fees setting up an accounting and inventory system. Although he had never run his own business before, on August 1 he opened his doors for business. What is the maximum amount of deduction for the current year attributable to these expenditures?

30. Toby, owner of a cupcake shop in New York, is considering opening a similar business (i.e., a cupcake shop) in Phoenix. After spending $4,200 investigating such possibilities in Phoenix, Toby decides against opening the store. What is the maximum amount of deduction for the current year attributable to these expenditures?

31. Jones, Inc., a calendar-year taxpayer, is in the air conditioner repair business. The business uses the cash method. In December of the current year, Jones charged $100 of supplies at Refrigeration, Inc., (he will pay the credit card bill in January) and also purchased $600 of supplies at XYZ on open account (he will make a payment on the open account in January). What is the amount that is deductible by Jones, Inc., in the current year?

32. On August 1 of this year, Sharon, a cash method taxpayer, signs a lease for office space and begins business. The lease is for 3 years. At the time the lease is signed, Sharon pays the $12,600 rent for the entire 36-month lease term. How much can Sharon deduct this year?

33. On December 1, Robert, a cash method taxpayer, borrows $10,000 from the bank for use in his business. Under the terms of the loan, the bank discounts the loan by $300, paying Robert the $9,700 cash proceeds. If Robert repays the loan next year, he may deduct

34. In which of the following situations are points paid on a home mortgage loan not deductible in the year of payment?

35. On August 1 of the current year, Terry refinances her home and borrows $240,000. Terry is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on August 1 of the current year. How much, if any, of the points may Terry deduct in the current year?

36. On July 1 of the current year, Marcia purchases a new home and borrows $320,000. Marcia is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on July 1 of the current year. How much, if any, of the points may Marcia deduct in the current year?

37. Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received?

38. Which of the following statements is false?

39. Under the accrual method, recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for

40. Victor, a calendar year taxpayer, owns 100 shares of AB Corporation stock, which was purchased three years ago for $5,000. Victor sells all 100 shares on December 27, of the current year, for $4,000 and on January 5, of the following year, purchases 60 shares of AB Corporation stock. Victor's recognized loss will be

41. Ashley, a calendar year taxpayer, owns 400 shares of Yale Corporation stock that she purchased two years ago for $4,000. In the current year Ashley sells all 400 shares of the Yale Corporation stock for

$2,400 on December 27. On January 4 of the following year, Ashley purchases 300 shares of Yale Corporation stock for $800. Ashley's recognized loss and her basis in the newly purchased 300 shares of Yale Corporation stock are

42. Samuel, a calendar year taxpayer, owns 100 shares of R Corporation common stock which was purchased two years ago for $3,600. Samuel sells all 100 shares on December 27 of the current year for

$1,000. On January 4 of the following year, Samuel purchases 40 shares of R Corporation preferred stock. Samuel's recognized loss will be

43. Which of the following individuals is not considered a relative for purposes of the loss disallowance rules under Sec. 267?

44. Erin, Sarah, and Timmy are equal partners in EST Partnership. Sarah also owns 40% of Elton Corporation. The remaining shareholders of Elton Corporation are: Erin (24%) and Sarah's uncle (36%). What percent ownership does Sarah directly or constructively own in Elton Corporation?

45. Jason sells stock with an adjusted basis of $66,000 to JJ Inc., his 60% owned corporation, for its fair market value of $60,000. JJ Inc. sells the stock three years later for $67,000. JJ Inc.'s recognized gain or loss on the sale will be

46. Donald sells stock with an adjusted basis of $38,000 to his son, Kiefer, for its fair market value of

$30,000. Kiefer sells the stock three years later for $32,000. Kiefer will recognize a gain on the subsequent sale of

47. Dana purchased an asset from her brother for $15,000. Her brother's basis was $20,000. If Dana sells the asset to an unrelated party for $12,000, she will recognize

48. Sheila sells stock, which has a basis of $12,000, to her daughter for $7,000, the stock's fair market value. Subsequently, the daughter sells the stock to an unrelated party for $5,000. Which of the following is true for the Sheila and the Daughter?

49. Rob sells stock with a cost of $3,000 to his daughter for $2,200, which is its fair market value. Later the daughter sells the stock for $3,200 to an unrelated party. Which of the following describes the tax treatment to Rob and Daughter?

50. Bart operates a sole proprietorship for which he uses the accrual method of accounting. Bart's sister Samantha, a cash method taxpayer, did some advertising work for Bart's business in November 2013. In December, Bart received a billing statement from Samantha for $5,000. Bart paid Samantha the $5,000 in January 2014. Samantha is a calendar year taxpayer. When may Bart deduct the $5,000?

51. Which of the following factors is not used to determine whether an activity is a hobby or a business?

52. For the years 2009 through 2013 (inclusive) Max, a surgeon, has been involved in raising poodles. Only in 2012 and 2013 did his revenue exceed the expenses from the activity. Which statement is correct?

53. For the years 2009 through 2013 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2009, 2010 and 2011 her revenue exceeded the expenses from the activity. In 2012 and 2013, the antique store generated a loss. Which statement is correct?

54. Abigail's hobby is sculpting. During the current year, Abigail sold three of her sculptures for a total of $3,200. Her related expenses include $1,500 in utilities, $1,200 in supplies and $900 in depreciation. Of the total expenses incurred, Abigail may deduct

55. Kyle drives a race car in his spare time and on weekends. His records regarding this activity reflect the following information for the year.

What is the allowable deduction (before any AGI limitation) for depreciation assuming that this activity is not engaged in for profit and Kyle can itemize his deductions?

56. Juanita knits blankets as a hobby and sells them. In the current year, she earns $5,000 from her blanket sales and incurs expenses of $600. Juanita does not itemize deductions. On her tax return, she should