Chapter 6 In Class Notes

Question 1

Is it better to have deductions for AGI or from AGI

Answer 1

For AGI because it lowers the AGI and if the AGI is lower than the standard deduction there’s no tax. And things are based off of the percentage above the AGI. Percent above AGI is deductible.

Question 2

What are 3 types of For AGI deductions

Answer 2

Business expenses
investment expenses
Misc

Question 3

To qualify as Business Expenses it must meet 3 requirements

Answer 3

Ordinary - normal, usual, and customary
Necessary - appropriate and helpful
Reasonable - solely with respect to salaries and other compensation
for services.

Question 4

An accrual of expenses for tax purposes has to meet 3 tests.

Answer 4

1. The Liability must be a fixed amount
2. The liability can be determined accurately
3. The expenditure must be connected to a service that is actually provided to a customer/taxpayer.(Economic Performance test)

Question 5

Says before you can accrue an expenditure under the accrual method of accounting you must provide the services to the customer.

Answer 5

Economic Performance test

Question 6

If you pay a lobbyist to monitor legislation. Is it deductible

Answer 6

It is completely deductible.

Question 7

If you pay a lobbyist to influence and change the legislation is it taxable.

Answer 7

If it’s less than 2,000 it is deductible. If it’s greater it is taxed.

Question 8

If a computer manufacturing business spends 50,000 on deciding if they should expand to manufacturing in Wyoming. Is it deductible.

Answer 8

Yes it is because it’s research on if they should manufacture.

Question 9

If a computer manufacturing business spends 50,000 on deciding if they should expand and retail furniture in wyoming would it be deductible.

Answer 9

No it is nondeductible because it doesn’t pass the Business Expense requirements

Question 10

What determines if it’s a business or a hobby

Answer 10

What amount of personal satisfaction does it give. What’s the nature of the experience. How much money do they make.

Question 11

3 Kinds of structures you can have for vacation homes

Answer 11

1. Rental Home/Property
2. Second Residence
3. Vacation home

Question 12

The only thing you can deduct for Second Residence (a home in Vegas or somewhere where you visit once in a while) is?

Answer 12

Interest expenses and property taxes as itemized deductions

Question 13

If you have rental home/property you can deduct what..

Answer 13

Revenue - expenses = NOI

Question 14

If you rent the home sometimes and live there sometimes it turns into?

Answer 14

vacation homes.

Question 15

What can you deduct?

Answer 15

Revenue - interest expenses - Operating expenses - dependency exemptions =

Question 16

How to determine if it’s vacation home, second home, or rental home/property

Answer 16

Depends on the time they live in it.

Question 17

If the residence is rented for fewer than 15 days in a year, it is treated as a

Answer 17

personal residence or second residence. The rent income is excluded from gross income, and mortgage interest
and real estate taxes are allowed as itemized deductions, as with any personal residence.

Question 18

If the residence is rented for 15 days or more in a year and is not used for personal
purposes for more than the greater of (1) 14 days or (2) 10 percent of the total
days rented, the residence is treated as

Answer 18

rental property. The expenses must be
allocated between personal and rental days if there are any personal use days during
the year. The deduction of the expenses allocated to rental days can exceed
rent income and result in a rental loss. The loss may be deductible, subject to the
at-risk and passive activity loss rules (discussed in Chapter 11

Question 19

If you paid for a car in cash for your business is the expenses all deductible that year.

Answer 19

No it has to be defferred because the useful life is more than 1 year. It’s a capital asset.

Question 20

You can never deduct losses on the sale of personal use asset?

Answer 20

True

Question 21

You can deduct losses on sale of business assets?

Answer 21

True

Question 22

Are losses on sale of personal use assets deductible.

Answer 22

No

Question 23

If you pay your kids too much from your corporation what happens to the income given to the kids.

Answer 23

It’s not ordinary, reasonable and the other one so it’s taxed as if it was given to the parents as a dividend so it’s still taxed twice.

Question 24

39. LO.2 Maud, a calendar year taxpayer, is the owner of a sole proprietorship that uses
    the cash method. On February 1, 2012, she leases an office building to use in her business
    for $120,000 for an 18-month period. To obtain this favorable lease rate, she pays
    the $120,000 at the inception of the lease. How much rent expense may Maud deduct
    on her 2012 tax return?

Answer 24

Maud can deduct $120,000 in 2012 for the rent for February 2012 through July 2013. She does qualify under the one-year rule for prepaid expenses since the period for which prepayments have been made does not extend past December 31, 2013. Example 8

Question 25

A guy on the accrual method had a rock concert and got gross receipts of 300,000. The cleanup was next year. So the entertainment and food happened in year 1 and the cleanup happened in year 2. How are the expenses incurred

Answer 25

The food and entertainment costs will be taxed in year 1 and the cleanup costs are taxed in year 2. This is not prepaid expense, it’s a normal expense.

Question 26

On last question if you used cash method and paid for everything in year 1, how would it be taxed?

Answer 26

They would be expensed the same way as accrual because even though it’s cash method the expense is deferred to year 2. Even though it’s a prepaid expense now. Exception is if it’s a reoccurring expense

Question 27

For publicly traded corporations, the maximum compensation that is deductible is

Answer 27

a million dollars for the CEO and the top 4 most highly paid executives. Performance paid bonuses are not subject to this 1 million dollar rule.

Question 28

Terry spends 52,000 investigating to expand his hardware business. He doen’t ever expand eventually. Is the 52,000 deductible?

Answer 28

Yes

Question 29

What about if he did get the stores?

Answer 29

Yes it’s deductible.

Question 30

What if he expands into another type of business?

Answer 30

Not deductible.

Question 31

Do Question 49

Answer 31

.