Chapter 6

Question 1

The courts have held that whether and to what extent deductions are allowed depends on __________.

Answer 1

Legislative Grace

Question 2

______ are also important in determining the amount of intemized deductions because many itemized deductions are limited to amounts in excess of specified percentages of AGI.

Answer 2

Deductions for AGI

Question 3

If a deduction is not listed in section 62, it is a/an _____, not a/an _______

Answer 3

deductino for AGI

Question 4

The Code defines ______ as the deductions allowed other than “the deductions allowable in arriving at adjusted gross income.

Answer 4

itemized deductions

Question 5

Section 212 expenses related to rent and royalty income are _______

Answer 5

Deductions for AGI

Question 6

Expenses paid in connection with the determination, collection, or refund of taxes related to the income of sole proprietorships, rents and royalties, or farming operations are ________. All other section 212 expenses are _______

Answer 6

Deductions for AGI

Itemized deductions

Question 7

Section 162 permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. These incluse reasonale salaries paid for services, expenses for the use of business property, and part of self-employment taxes paid. Such expenses are ________

Answer 7

Deductions for AGI

Question 8

Section 162 excludes thses from classification as trade or business expenses:

Answer 8

• charitable contributions or gifts
• illegal bribes and kickback and certain treble damage payments
• fines and penalties

Question 9

A bride paid to a domestic official is ______ if it is illegal under the laws of the United States. F

Answer 9

Not deductible

Question 10

Foreign bribes are ______ unless they are unlawful under the Foreign Corrupt Practices Act of 1977

Answer 10

Deductible

Question 11

To be deductible any trade or business expense must be ________ & _________. These terms are found in sectios 162 & 212

Answer 11

ordinary & necessary

Question 12

An expense is _______ if it is normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature.

Answer 12

Ordinary

Question 13

The code refers to _______ solely with respect to salaries and other compensation for services. But the courts have held that for any business expense to be ordinary and necessary it must also be this.

Answer 13

Reasonable

Question 14

_________ of individual taxpayers are limited to those incurred a trade or business or in a transaction entered into for profit.

Answer 14

Deductible losses

Question 15

Individuals are also allowed to deduct losses that are the result of a ______

Answer 15

Casualty

Question 16

______ include but are not limited to, those causes by fire, storm, shipwreck, and theft

Answer 16

Casualty losses

Question 17

________are reduced by $100 per casualty, and the aggregate of all personal casualty losses is reduced y 10% of AGI

Answer 17

Deductible Personal Casualty Losses

Question 18

A personal casualty loss is a/an ________

Answer 18

itemized deduction

Question 19

All deduction for and from AGI wind up on page 1 and 2 of______

All deductinos for AGI are reported on _____

The last line of page 1 is ______

Answer 19

Form 1040

Page 1

adjusted gross income

Question 20

All ______ on page 2 are carried over from Schedule A

Answer 20

itemized deductions

Question 21

Paid refers to _______who get deductions only in the year of payment.

Incurred concerents the _____ who obtains the deduction in the year in which the liabilty for the expense becomes certain

Answer 21

Cash Basis Taxpayer

Accrual Basis Taxpayer

Question 22

The expenses of cash basis taxpayerse are _____ only when they are actually paid with cash or other property. Promising to pay or issuing a note does not satisfy the actually pair requirement.

Question 23

For cash basis taxpayers, the payment can be made with borrowed funds. At the time taxpayers charge expenses on their credit cards, they are allowed to ______. The are deemed to have simultaneously borrowed money from the credit card issuer and constructively paid the expenses.

Answer 23

Claim the deduction

Question 24

Cash basis and accrual basis taxpayers cannot take a currect deduction for _______ except through amortization, depletion, or depreciation over the life of the asset.

Answer 24

capital expenditures

Question 25

The payment must be required, not a voluntary prepayment, to obtain the \_\_\_\_\_\_. The taxpayer must also demonstrate that allowing it will not result in a material distortion of income

Answer 25

current deduction

Question 26

The period in which an accrual basis taxpayer can deduct an expense is fetermined by applying these 2 test:

Answer 26

* all events test * economic performance test

Question 27

All events test:

Answer 27

all of the events have occurred to create the taxpayer's liability and the amount of the liabilty can be determined with reasonale accuracy

Question 28

Economic performance test:

Answer 28

when the service, property, or use of property giving rise to the liabilty is actually performed for, provided to, or used by the taxpayer.

Question 29

An exceptino to the economic performance requirements allows certain reuccring items to be deducted if the following conditions are met:

Answer 29

* the item is recurring in nature and is treated consistently by the taxpayer * either the accrued item is not material or accruing it results in better matching of income and expenses * all of the events have occurred that determine the fact of the liabilty, and the amount of liabilty can be determined with reasonable accuracy * Economic performance occurs withing a reasonable period (but not later than 8 1/2 months are the close of the taxable year. )

Question 30

Deductions are disallowed for certain specific types of expenditures that are considered contrary to public policy as follows:

Answer 30

* Bribes and Kickbacks * Fines and penalties paid to a government for violation of law. * 2/3 of the treble damage payments made to claimants resulting from violation of the antitrust law

Question 31

Legal fees incurred in connectino with a criminal defense are ______ only if the crime is associated with the taxpayer's trade or business or income-producing activity.

Answer 31

deductible

Question 32

Deductible legal expenses associated with the following are deductible for AGI:

Answer 32

* Ordinary and necessary expenses incurred in connection with a trade of business * Ordinary and necessary expenses incurred in conjunction with rental or royalty property held for the production of income

Question 33

All other deductible legal expenses are

Answer 33

Deductible from AGI

Question 34

The usual expenses of operating and illegal business are \_\_\_\_\_\_. However, Sectoin 162 disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments

Answer 34

deductible

Question 35

An exception applies to expenses incurred in illegal trafficking in drugs. Drug dealers are _______ a deduction for ordinary and necassary business expenses incurred in their business. In arriving at gross income from the business, however, dealer may reduce total sales by the cost of goods sold.

Answer 35

not allowed

Question 36

Political Contributions and Lobbying Expenditures are \_\_\_\_\_\_

Answer 36

not deductible

Question 37

Lobbying expenses incurred in attempting to influence state or Federal legislation or the actions of certain high-ranking public officials are \_\_\_\_\_\_\_

Answer 37

Not deductible

Question 38

Three exceptions to the disallowance of lobbying expenses

Answer 38

* an exception is provided for influencing local legislation * the disallowance provision does not apply to activities devoted soley to monitoring legislation * a de minimis exception is provided for annual in-house expenditures, if these expenditures for not exceed $2,000. If the in-house expenditures exceed $2000, none of the in-house expenditures can be deducted

Question 39

The millionaires' provision limits the amount the employer can deduct for the compensation of a covered executive to ________ annually

Answer 39

one million

Question 40

Employee compensation excludes:

Answer 40

* commissions based on individual performance * certain performance-based compensation based on company performance according to a formula approved by a board of directors compensation commitee and by shareholder vote. The performance attainment must be certified by this compensation committee. * Payments to tax-qualified retirement plans * Payments that are excludible from the employee's gross income

Question 41

\_\_\_\_\_\_\_ are expenses paid or incurred to determine the feasibilty of entering a new business or expanding an exisiting business

Answer 41

Investigation expenses

Question 42

If the taxpayer is in a business that is the same as or similar to that being investigated, all investigation expenses are ______ in the year paid or incurred. The tax result is the same whether or not the taxpayer acquires the business being investigated.

Answer 42

deductible

Question 43

When the taxpayer is not in a business that is the same as or similar to the one being investigated, the tax result depends on whether the new business is aquired. If the business is not acquired, all investigation expenses are \_\_\_\_\_\_\_\_. If the business is acquired, the expenses must be _______ as start up expenses.

Answer 43

Nondeductible Capitalized

Question 44

When capitalizing the startup, the taxpayer can elect to have the first $5,000 of the expenses can be \_\_\_\_\_\_\_. Any excess can be _____ over a period of 280 months. In arriving at the $5,000 immediate deduction allowed, a dollar-for-dollar reduction must be made for those expenses in excess of $50,000.

Answer 44

Immediately deducted amortized

Question 45

Business or investment expenses are ______ only if the taxpayer can show that the activity was entered into for the purpose of making a profit

Answer 45

deductible

Question 46

While personal losses are \_\_\_\_\_\_\_\_, losses attributable to profit-seeking activitive are ______ and used to offset a taxpayer's other income.

Answer 46

not deductible deductible

Question 47

If an individual can show that an activity has been conducted with the intent to earn a profit, losses from the activity are \_\_\_\_\_\_\_.

Answer 47

fully deductible

Question 48

Hobby expenses are deductible only to the \_\_\_\_\_\_\_

Answer 48

extent of hobby income

Question 49

The code provides a rebuttable presumption that an activity is ______ if the activity shows profit in a least three of any five prior conservative years. If the activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rules. If these profitability tests are met, the activity is presumed to be _____ rather than a personal hobby.

Answer 49

Profit-seeking Trade or business

Question 50

If an activity is deemed to be a hobby, the expenses are deductible on the the extent of \_\_\_\_\_\_\_\_. Theses expenses must be deductible in this order:

Answer 50

The gross income of the hobby * Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest. * Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted bais. (include maintenence, utilities, and supplies ) * Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit. (include depreciation, amortization, and depletion.)

Question 51

Hobby losses deductions are deductible _____ to the extent they excees 2% of AGI.

Answer 51

From AGI \*If the taxpayer uses the standard deduction rther than itemizing, all hobby loss deductions are wasted.

Question 52

If the residence is rented for fewer than 15 days in a year, it is treated as a \_\_\_\_\_\_\_. The rent income is \_\_\_\_\_\_\_. and mortgage interest and real estate taxes are allowed as \_\_\_\_\_\_\_.

Answer 52

Personal Residence excluded from gross income itemized deductions \*no other expenses are deductible

Question 53

If the residence is rented for 15 days or more in a year and is not used for personal purposes for more than the greater of 14days or 10% of the total days rented, the residence is treated as \_\_\_\_\_\_\_. The expenses must be allocated between personal and rental days if there are any personal use days during the year. The deduction of the expenses allocated to rental days can _______ and result in a rental loss. The loss is \_\_\_\_\_\_\_, subject to the at-risk and passive activity loss rules.

Answer 53

rental property exceed rent income deductible

Question 54

If the residence is rented for 15 days or more in a year and is used for personal purposes for more than the greater of 14 days or 10% of the total days rented, it is treated a \_\_\_\_\_\_\_. The expenses must be allocated between personal days and rental days. Expense are allowed only to the \_\_\_\_\_\_. If a residence is classified as a personal/rental use property, the expenses that are deductible anyway must be \_\_\_\_\_\_. Expenses must be allocated between personal and rental days before the limits are applied. The courts have held that real estate taxes and mortgge interest, which accrue ratably over the year, are allocated o the basis of 365 days. Other expense are allocated on the basis of total days used.

Answer 54

personal/rented residence extent of rent income deducted first

Question 55

Taxes and interest are computed using days rented over 365 for _____ the rest is over the total days used.

Answer 55

Court's approach

Question 56

To be deductible, an expense must be incurred \_\_\_\_\_\_\_. An individual cannot claim a _____ for the payment of the expenses of another individual.

Answer 56

for the taxpayer's benefit or arise from the taxpayer's obligation tax deduction

Question 57

One exception to this disallowance rule is the payment of ______ for a dependent. Such expenses are deductible by the payor subject to the normal rules that limit the deductibility of medical expenses.

Answer 57

Medical Expenses

Question 58

The regulations further define capital expenditures to include those expenditures that \_\_\_\_\_\_\_\_. Incidental repairs and maintence of the property are not capital expenditures and can be deducted as ordinary and necassary business expenses.

Answer 58

add value or prolong the life of property or adapt the property to a new or different use.

Question 59

When an expenditure is _______ rather than expensed, the deduction is at best deffered and at worst lost forever. Although an immediate tax benefit for a large cash expenditure si lost, the cost may be \_\_\_\_\_\_

Answer 59

Capitalized deductible in increments over a longer period of time.

Question 60

If the expenditure is for a tangible asset that has an ascertainable life, it is ______ and \_\_\_\_\_\_\_

Answer 60

capitalized may be deducted as depreciation over the life of the asset or over a statutory period.

Question 61

If the expenditure is for an intangible asset, the capitalized expenditure \_\_\_\_\_

Answer 61

can be amortized regardless of whether the intangible asset has an ascertainable life.

Question 62

Section 197 intangible assets are amortized over a 15 year statutory period using \_\_\_\_\_\_

Answer 62

Straight line

Question 63

The Code provides for the disallowance of any "losses from sales or exchanges of property.... directly or indirectly" between related parties. When the property is subsequently sold to a nonrelated party, any gain recognized is \_\_\_\_\_.Any disallowed loss not used by the related-party buyer to offset the recognized gain on a subequent sale or exchange to an unrelated party is permanently lost.

Answer 63

reduced by the loss previously disallowed.

Question 64

Related parties are created by \_\_\_\_\_

Answer 64

brith marriage business

Question 65

Related parties include:

Answer 65

* Brothers/Sisters, spouse, ancestors, and lineal descendants * A corporation owned more than 50% by the taxpayer * Two corporations that are members of a controlled group * A series of other complex relationships between trusts, corporations, and individual taxpayers

Question 66

Nonreimbursed expenses \_\_\_\_\_ Reimbursed Expenses \_\_\_\_\_\_

Answer 66

From AGI For AGI