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Exam 5: Business Deductions

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Question 81

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Tracy invested in the following stocks and bonds during 2013. To finance the investments,she borrowed $100,000 from Swan Bank.Interest expense paid on the loan during 2013 was $5,000.During 2013,Tracy received $1,250 of dividend income from Blue,Inc.and $3,000 of interest income on the municipal bonds.

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Question 82

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Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.

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Question 83

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The basis of an asset on which $500,000 has been expensed under § 179 will be reduced by $500,000,even if $500,000 cannot be expensed in the current year because of the taxable income limitation.

In a related party transaction where realized loss is disallowed,when can the disallowed loss be used by the buyer on the subsequent sale of the property? In the case of a related party disallowed loss transaction,can the related party seller's disallowed loss be used by a taxpayer other than the related party buyer?

If a taxpayer operated an illegal business (not drug trafficking),what expenses can be deducted and what expenses are disallowed?

LD Partnership,a cash basis taxpayer,purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building.The gross receipts of the partnership are less than $100,000.LD must capitalize the $50,000 paid for the land,but can deduct the $150,000 paid for the building in the current tax year.

The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years.

Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.

Purchased goodwill must be capitalized,but can be amortized over a 60-month period.

The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of a shareholder-employee's gross income,but results in an increase in the taxable income of the corporation.

On June 1,2013,Sam purchased used farm machinery for $150,000.Sam used the machinery in connection with his farming business.Sam does not elect to expense assets under § 179.Sam has,however,made an election to not have the uniform capitalization rules apply to the farming business.Sam takes additional first-year depreciation when available.Determine the cost recovery deduction for 2013.

Briefly discuss the disallowance of deductions for capital expenditures.

If more than 40% of the value of property,other than real property,is placed in service during the last quarter,all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

On December 20,2013,the directors of Quail Corporation (an accrual basis,calendar year taxpayer)authorized a cash donation of $5,000 to the American Cancer Society,a qualified charity.The payment,which is made on April 10,2014,may be claimed as a deduction for tax year 2013.

Mary purchased a new five-year class asset on March 7,2013.The asset was listed property (not an automobile) .It was used 60% for business and the rest of the time for personal use.The asset cost $900,000.Mary made the § 179 election.The income from the business before the § 179 deduction was $600,000.Mary does take additional first-year depreciation.Determine the total deductions with respect to the asset for 2013.

If part of a shareholder/employee's salary is classified as unreasonable,determine the effect on the:

Ordinary and necessary business expenses,other than cost of goods sold,of an illegal drug trafficking business do not reduce taxable income.

For a president of a publicly held corporation,which of the following are not subject to the $1 million limit on executive compensation?

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.