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Exam 6: Deductions and Losses: in General

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Question 21

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Which of the following is relevant in deciding whether an activity is profit-seeking or a hobby?

A) The time and effort expended.
B) The expertise of the taxpayers or their advisers.
C) The history of income or losses from the activity.
D) The tax benefits of the activity to the taxpayer.
E) All of the above factors are to be considered.

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

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Question 22

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For an activity classified as a hobby,the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g.,depreciation,amortization,and depletion) . (2) Amounts deductible under other Code sections without regard to the nature of the activity,such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit,but only if those amounts do not affect adjusted basis (e.g.,maintenance,utilities,and supplies) . If these expenses exceed the gross income from the activity and are thus limited,the sequence in which they are deductible is:

A) (1) , (2) , (3) .
B) (1) , (3) , (2) .
C) (2) , (3) , (1) .
D) (2) , (1) , (3) .
E) (3) , (2) , (1) .

F) A) and C)
G) A) and B)

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Question 23

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If a vacation home is classified as primarily rental use,a deduction for all of the rental expenses is allowed.

Amos,a shareholder-employee of Pigeon,Inc.,receives a $400,000 salary.The IRS classifies $125,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Amos' gross income by $125,000 and increase Pigeon's gross income by $125,000.

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.

Emelie and Taylor are employed by the Federal government and own their home in Washington,

Gladys owns a retail hardware store in Tangipahoa.She is considering opening a business in Hammond,a community located 25 miles away.She incurs expenses of $60,000 in 2012 in investigating the feasibility and desirability of doing so.What amount can Gladys deduct in 2012 if the business is:

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

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.

Olive,Inc.,an accrual method taxpayer,is a corporation that is equally owned by Maurice and Alex,who are brothers.The corporation uses the accrual method of accounting and the shareholders use the cash method.To provide Olive with funds to acquire additional working capital,the shareholders each loan Olive $100,000 with a 6% interest rate.At the end of the tax year,there is unpaid accrued interest of $3,000 due to each shareholder.From a timing perspective,when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

Which of the following expenses associated with the illegal sale of whiskey (i.e.,bootlegging) can be deducted?

The legal cost of having a will prepared is not deductible.

Which of the following must be capitalized by a business?

Which of the following are deductions for AGI?

Briefly discuss the disallowance of deductions for capital expenditures.

Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.

Arnold and Beth file a joint return.Use the following data to calculate their deduction for AGI.

In applying the $1 million limit on deducting executive compensation,what corporations are subject to the deduction limit? What executives are covered?

Which of the following is not a related party for constructive ownership purposes under § 267?

A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.