FAR 30 - Deductions 1 - Principles/From AGI Flashcards Preview

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Flashcards in FAR 30 - Deductions 1 - Principles/From AGI Deck (10):
1

On December 1, 2013, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 2014. Michaels paid the entire interest of $12,000 on December 31, 2013.

What amount of interest was deductible on Michaels' 2014 income tax return?
A. $12,000
B. $11,000
C. $1,000
D. $0

B. Cash basis taxpayers report income when cash or property is actually or constructively received. There is no constructive receipt for deductions. Deductions for cash basis taxpayers generally are taken when actually paid. However, for expenses covering 12 months or more, the deduction must be spread over the period for which the expenses apply. Thus, since the loan was to be repaid in 12 months, the deduction for the interest must be spread over the 12 month period.

Thus, to account for the period of December 1, 2013 to December 31, 2013, Michaels would have deducted $1,000 of the interest on her 2013 income tax return and $11,000 on her 2014 income tax return to account for the period January 1, 2014 to November 30, 2014.

2

Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy) 3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries) 4,000

What amount should Ral deduct for keyman and group life insurance premiums in computing taxable income for 2014?
A. $0
B. $3,000
C. $4,000
D. $7,000

C. A taxpayer may not deduct life insurance premiums in which the taxpayer is directly or indirectly the beneficiary. Hence, Ral Corp. may not deduct the $3,000 in keyman insurance premiums that it paid on Budd's life because the corporation is the beneficiary. However, a taxpayer may deduct the group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds. Thus, Ral Corp. may deduct the $4,000 in group term insurance premiums paid on the $10,000 life insurance policies for each of Ral Corp.'s four employees.

3

Sam has been engaged in an illegal business this year related to electronically stealing funds from individuals' bank accounts. Which of the following items is not deductible on his business tax return for the year?
A. Salaries for two individuals that helped him operate the business.
B. Rent expense for an office used to operate the illegal business.
C. Interest expense on a loan used to purchase equipment for the business.
D. The salaries, rent expense, and interest expense are all deductible.

D. The ordinary, necessary, and reasonable expenses of operating illegal businesses (other than illegal drug activity) are permitted (as long as the expense itself is not against public policy). Therefore, all of these expenses are deductible against the revenue earned from the activities.

all of these items are deductible even though it is an illegal business. Taxes apply to NET income, not GROSS income.

4

A corporation's penalty for underpaying federal estimated taxes is
A. Not deductible.
B. Fully deductible in the year paid.
C. Fully deductible if reasonable cause can be established for the underpayment.
D. Partially deductible.

A. Fines and penalties generally may not be deducted as a business expense, including those paid to the federal government. Hence, a corporation's penalty for underpaying federal estimated taxes is not deductible.

5

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income?

I. Cost of merchandise
II. Business expenses other than the cost of merchandise

I only. No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. However, a deduction is allowed for the cost of merchandise purchased.

6

T/F: Any business expenditure that benefits future years can be deducted this year if the taxpayer makes an affirmative election.

False.
Expenditures benefiting more than one period must be capitalized rather than expensed.

7

T/F: Lobbying expenses at the federal level are not deductible, but are deductible if directed at policymakers at the state level.

False.
Lobbying expenses at the state and federal level are not allowed deductions; deductions are permitted at the city and county government level.

8

Which of the following conditions must be present for a payment to qualify as deductible alimony?

I. Payments must be in cash.
II. The payments must end at the recipient's death.

Both I and II. Alimony payments you make under a divorce or separation instrument, such as a divorce decree or a written agreement incident thereto, are deductible if all of the following requirements are met:

You and your spouse or former spouse do not file a joint return with each other,
You pay in cash (including checks or money orders),
The divorce or separation instrument does not say that the payment is not alimony,
If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment,
You have no liability to make any payment (in cash or property) after the death of your spouse or former spouse; and
Your payment is not treated as child support.

9

Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses:

Moving the household goods $2,000
Temporary living expenses in Atlanta 400
Lodging on the way to Atlanta 100
Meals 40

What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses?
A. $100
B. $120
C. $500
D. $520

A. Qualified moving expenses are limited to the expenses for moving the household goods ($2,000) and lodging ($100). Meals are not deductible during a move and temporary living expenses are never deductible. The $2,100 of qualified expenses is reduced by the $2,000 reimbursement from the employer.

10

Dale received $1,000 in 2014 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2014.

In Dale's 2014 income tax return, the $1,000 jury duty fee should be
A. Claimed in full as an itemized deduction.
B. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.
C. Deducted from gross income in arriving at adjusted gross income.
D. Included in taxable income without a corresponding offset against other income.

C. If an employer requires jury pay to be remitted in exchange for regular compensation for the period the employee was performing jury duty, the employee may deduct the jury duty pay from her gross income as an adjustment arriving at adjusted gross income.

As Dale was required by her employer to remit the $1,000 in jury duty pay in exchange for regular compensation for the period the employee was performing jury duty, Dale should deduct the jury duty pay from her gross income in arriving at adjusted gross income.

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