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Exam 6: Deductions and Losses: in General

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Question 21

Multiple Choice

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Melba incurred the following expenses for her dependent daughter during the current year: $\begin{array} { l r } \text { Payment of principal on daughter's automobile loan } & \$ 3,600 \\\text { Payment of interest on daughter's automobile loan } & 2,900 \\\text { Payment of daughter's property taxes } & 1,800 \\\text { Payment of principal on daughter's personal residence loan } & 2,800 \\\text { Payment of interest on daughter's personal residence loan } & 7,000\end{array}$ How much may Melba deduct in computing her itemized deductions?

A) $0.
B) $8,800.
C) $11,700.
D) $18,100.
E) None of these.

F) None of the above
G) A) and D)

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Question 22

Multiple Choice

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In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale.Five months later, James sold the same stock through his broker for $27,000.What is the tax effect of these transactions?

A) Disallowed loss to James of $2,000; gain to Lance of $1,000.
B) Disallowed loss to Lance of $2,000; gain to James of $3,000.
C) Deductible loss to Lance of $2,000; gain to James of $3,000.
D) Disallowed loss to Lance of $2,000; gain to James of $1,000.
E) None of these.

F) C) and E)
G) D) and E)

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Question 23

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The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.

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.

A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby- related expenses.

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.

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.

Which of the following is a deduction for AGI?

On January 2, 2019, 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 2019?

During 2018, 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 2019.What is the amount of the deduction for salary expense?

Ralph 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.

Robin 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, Robin and Jeff each receive a total salary of $125,000.This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.

Martha rents part of her personal residence in the summer for three 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.

Two-thirds of treble damage payments under the antitrust law are not deductible.

A vacation home at the beach that is rented for 200 days and used personally for 16 days is classified in the personal/rental use category.

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

Albie operates an illegal drug-running business and has the following items of income and expense.What is Albie's adjusted gross income from this operation? $\begin{array} { l l r } \text { Income } & & \$ 800,000 \\\text { Expenses: } & & \\& \text { Rent } & 24,000 \\& \text { Utilities } & 9,000 \\& \text { Bribes to police } & 55,000 \\& \text { Medical expense } & 5,000 \\& \text { Legal fees } & 25,000 \\& \text { Depreciation } & 30,000 \\& \text { Illegal kickbacks } & 30,000 \\& \text { Cost of goods sold } & 300,000\end{array}$

In order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18- month lease for $36,000.The lease commences on October 1, 2019.How much of the $36,000 payment can she deduct in 2019 and 2020? a.If Mella is an accrual basis taxpayer? b.If Mella is a cash basis taxpayer?

Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year.The rental income is $6,000 and the expenses are as follows: $\begin{array} { l r } \text { Mortgage interest } & \$ 9,000 \\\text { Real estate taxes } & 3,000 \\\text { Utilities } & 2,000 \\\text { Maintenance } & 1,000 \\\text { Insurance } & 500 \\\text { Depreciation (rental part) } & 4,000\end{array}$ Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:

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