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Exam 5: Business Deductions

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Question 1

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How can an individual's consultation with a lawyer be classified as a deduction for AGI in some cases and a deduction from AGI in other instances?

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Legal expenses are deductible when they ...

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Question 2

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On June 1, 2016, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table for such leases is $241, determine Norm's gross income inclusion amount.

A) $0
B) $241
C) $907
D) $1,687
E) None of the above

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

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Question 3

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Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin:

The cost of depreciable property is not a research and experimental expenditure.

On April 5, 2016, Orange Corporation purchased, and placed in service, seven-year class assets costing $540,000 and five-year class assets costing $140,000. Orange elects to expense the maximum amount under § 179. Orange does not take additional first-year depreciation (if available). Assume taxable income is not a limitation. Determine Orange Corporation's cost recovery with respect to the assets for 2016.

On April 15, 2016, Sam placed in service a storage facility (a single-purpose agricultural structure) costing $80,000. Sam also purchased and planted fruit trees costing $40,000. Sam does not elect to expense any of the acquisitions under § 179, and he elects not to take additional first-year depreciation (if available). Determine Sam's cost recovery from these two items for 2016.

Kitty runs a brothel (illegal under state law) and has the following items of income and expense. What is the amount that she must include in taxable income from her operation?

On June 1, 2016, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000. She used the assets 40% for business, 50% for the production of income, and 10% for personal use. These are the only assets Gabriella purchased during the current year. Determine her total cost recovery deduction for the current year.

Regarding research and experimental expenditures, which of the following are not qualified expenditures?

On December 16, 2016, 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 11, 2017, may be claimed as a deduction for tax year 2016.

Under the MACRS straight-line election for personalty, only the half-year convention is applicable.

On May 2, 2016, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine the cost recovery for 2016. Karen wants to maximize her deductions.

On June 1, 2016, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2016 for the patent.

What are the three methods of handling research and experimental expenditures incurred in a trade or business? Under what circumstances would you choose each?

All personal property placed in service in 2016 and used in a trade or business qualifies for additional first-year depreciation.

A purchased trademark is a § 197 intangible.

Carlos purchased an apartment building on November 16, 2016, for $3,000,000. Determine the cost recovery for 2016.

Zeke made the following donations to qualified charitable organizations during the year: ​ The used clothing was donated to the Salvation Army; the other items of property were donated to Eastern State University. Both are qualified charitable organizations. Disregarding percentage limitations, Zeke's charitable contribution deduction for the year is:

Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother, Shirley, for $160,000. Walter reinvests the proceeds in the stock market. Shirley holds the land for one year and a day and sells it in the marketplace for $169,000. a.​Determine the tax consequences to Walter. b.Determine the tax consequences to Shirley.

Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are computed as follows. If Tara sells the machine after three years for $15,000, how much gain should she recognize?