Ch 6

Question 0

The deduction for charitable contributions, may not exceed…

Answer 0

50% of taxpayer’s AGI

Question 1

2 categories of deductions for individuals

Answer 1

1 deductions subtracted from gross income to calculate AGI

2 deductions subtracted from AGI to calculate taxable
Income

Question 2

High income tax payers experience a phase out for 2 things? At what threshold?

Answer 2

Standard deductions and Personal exemptions

$250,000 single, $300,000 married

Question 3

4 common examples of deductions for AGI?

Answer 3

1 moving expenses
2 alimony paid
3 one half of self employment taxes
4 student loan interest

Question 4

4 expenditures a taxpayer may not deduct?

Answer 4

1 capital expenditure
2 expense related to tax exempt income
3 illegal or violation of public policy
4 specifically disallowed by tax law

Question 5

A taxpayer may deduct business or investment expenses if…

Answer 5

It’s a profit of trade motivated activity

Question 6

The IRC classifies expenses incurred in trade and business as…

2) investment expenses other than those incurred to produce rents and royalties are classified by the IRC as…

Answer 6

Deductions for AGI

2) deductions from AGI

Question 7

Supreme court’s definition of what constitutes trade or business?

Answer 7

Holding one’s self out to others as engaged in selling goods

Or services

Question 8

Expenses incurred by an individual in an investment activity, such as researching stocks and other than producing rents or royalties, are considered what kid of deductions?

2) When are they deductible?

Answer 8

Miscellaneous itemized deductions

2) deductible when they exceed 2% of taxpayer’s AGI

Question 9

Legal and accountings fees

Answer 9

May generally be deducted if incurred for regular conduct
Of trade, business or production of income

Considered: deductions for AGI

Question 10

Tax payers may not deduct legal fees they incur in connection with…

2) what must they do?

Answer 10

Purchase of property

2) they must capitalize them

Question 11

Fees for Determination, collection or refund of any tax

Answer 11

Considered deductions from AGI

Question 12

Personal expenses like legal fees incurred for divorce

Answer 12

Generally aren’t deductible

Tax advice given in incident of divorce qualifies for partial deduction

Question 13

How is a business or investment expense considered ordinary?

Answer 13

Must be reasonable in amount

bear proximate relationship to income producing activity or property even if it’s not yet profitable

Question 14

Necessary expense

Answer 14

Appropriate and helpful

Would a prudent businessperson incur same expenditure
Under similar circumstances

Question 15

Taxpayers may not take a deduction for a loss or expense of…

1 exception?

Answer 15

Another person

May take deduction for medical expenses paid on behalf
Of a dependent, or almost qualifies as dependent

Question 16

Expenses related to tax exempt income

Answer 16

May not deduct any expenses related or allocated to tax

Exempt income

Question 17

Debt taken to finance

Answer 17

Depends on intent (mortgage on personal residence can be
Deducted)

Debt taken to by securities can’t be

Question 18

Political contributions, political advertising and lobbying expenses

Answer 18

Are not deductible

Question 19

Taxpayers may deduct lobbying expenses incurred to influence legislation on the local level if the legislation is of…

Answer 19

Direct interest to the taxpayer’s business

Question 20

Business investigation expenses

Answer 20

Expenses tax payer incurs reviewing and analyzing a
Prospective business before deciding whether to acquire
Or create it

Ex. Expenses include: Market surveys, traffic patterns, products, labor supplies, distribution facilities

Question 21

Costs incurred in connection with issuance if stock or securities…
Where are they charged?

Answer 21

Do not qualify as start up costs

Charged to paid in capital

Question 22

Preopening AKA startup costs

Answer 22

Expenses incurred after taxpayer decides to acquire or
create Business, but before business activity itself starts

Ex. Training employees, advertising, securing supplies, distributors, potential customers, setting up business’s books and records

Question 23

In the cash method of accounting, expenses are generally deductible when…

Answer 23

Actually paid

Question 24

In general a capital expenditure or prepayment of expenses by a cash method taxpayer…

Answer 24

Does not result in deduction if expenditure creates an
Asset having a useful life that extends beyond the close
Of the tax year

Question 25

Prepaid interest

Answer 25

Deduct prepaid interest expense over period of loan

To which interest charge is allocated

Question 26

The accrual method taxpayer deducts expenses in…

Answer 26

The period in which they accrue

Question 27

Items accrue when the transactions meets what 2 tests?

Answer 27

1 all-events test

2 economic performance test

Question 28

All events test: 2 conditions

Answer 28

1 existence of liability is established

2 amount of liability is determined with reasonable accuracy

Question 29

Economic performance test

Answer 29

When economic performance occurs is Based on type of transaction

Question 30

Wash sales

Answer 30

Disallowed losses

Taxpayer sells a stock security and acquires same stock
Security within 30 days after date of sale

61 day period extends to 30 days before date of sale and
30 days after date of sale

Question 31

Example of substantially identical securities

Answer 31

Bonds that mature within a few months of each other

Question 32

Basis of stock in wash rule

Answer 32

The loss in the security is deferred

Question 33

Related parties

Answer 33

1 Individuals and there families
2 individuals and corporations or partnership where individuals own more than 50% of S or C corporation/ or partnership
3 grantor or fiduciary relationship with trust

Question 34

Related tax payers may not take current deductions on 2

Specific types of transactions

Answer 34

1 losses on sales of property

2 accrued expenses that remain unpaid to related cash
Method taxpayer at end of tax year

Question 35

Construction ownership rules

Answer 35

Stock owned by other family members or families trust

Is considered owned by individual

Question 36

When is a rental home considered a residence?

Answer 36

When you live there 10% of rental days and at least 14 days

Question 37

The term principal place of business…

Answer 37

Includes home office used by taxpayer for administrative and management activities

Question 38

When is a hobby activity considered a business under tax law?

Answer 38

Gross income exceeds deductions from activity 3 out of 5 consecutive years