Topic 4/5 Deduction and Itemized Deduction Flashcards
All business expense deductions are claimed as itemized deductions.
True or False
False
Explanation
Business expenses are generally for AGI deductions, if they are deductible.
All business expense deductions are claimed as “below the line” deductions.
True or False
False
Explanation
Most business expenses are claimed as for AGI deductions.
The phrase “ordinary and necessary” means that an expense must be appropriate and helpful for generating a profit.
True or False
True
Self employed taxpayers can deduct the cost of health insurance as long as they are not eligible to participate in their spouses’ employer-provided health plan.
True or False
True
Explanation
A self-employed individual cannot be eligible to participate in a plan.
To be deductible, business expenses must be directly related to a business activity.
True or False
True
The deduction for investment interest in excess of the net investment income carries forward to the subsequent year.
True or False
True
Generally, service businesses are considered qualified trade or businesses for purposes of the deduction for qualified business income.
True or False
False
Explanation
Service businesses are generally excluded from the definition of qualified trade or businesses for purposes of the deduction.
Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because:
Multiple Choice
employers are allowed to deduct social security (FICA) taxes as a business expense.
self-employed taxpayers need an alternate mechanism for reducing the cost of health care.
this deduction provides a measure of equity between employees and the self-employed.
health insurance premiums cannot be deducted otherwise.
this deduction provides a measure of equity between employees and the self-employed.
Explanation
Employers are allowed to deduct the premium as a compensation expense and employees are allowed to exclude from taxable income the value of the premiums paid on their behalf.
Which of the following statements regarding tax deductions is false?
Multiple Choice
Taxpayers are not entitled to any deductions unless specific provisions in the tax code allow the deductions.
Deductions can be labeled as deductions above the line or deductions below the line.
From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities.
The standard deduction is a from AGI deduction.
From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities.
Explanation
For AGI deductions tend to be associated with business activities.
All of the following are for AGI deductions except:
Multiple Choice
Contributions to qualified retirement accounts
Rental and royalty expenses.
Business expenses for a self-employed taxpayer.
Charitable contributions.
Charitable contributions.
Explanation
Charitable contributions are from AGI deductions.
Ben is employed as a carpenter and his wife, Marilyn, is a self-employed consultant. Besides Ben’s salary, Ben and Marilyn own a condominium that they rent to tourists and do not use personally. This year they paid $2,200 for utilities in the condo. Marilyn also paid self-employment tax of $4,200 and Ben had $3,000 of Social Security taxes withheld from his pay. Which of the following is a true statement?
Multiple Choice
One-half of Ben’s social security tax is deductible for AGI.
The cost of the utilities is deductible for AGI.
Marilyn’s self-employment tax is not deductible.
Only the $2,200 utility bill is deductible for AGI.
The cost of the utilities is deductible for AGI.
Explanation
The entire cost of the utilities would be a for AGI deduction assuming no personal use of the condo. The employer portion of Marilyn’s self-employment tax would be deductible as well.
Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is deductible after considering the excess business loss rules?
Multiple Choice $270,000. $250,000. $20,000. $0.
$250,000.
Explanation
The nondeductible excess business loss is $20,000 (the taxpayer’s aggregate business deductions ($270,000) over the sum of his business gross income $0 and $250,000).
Bruce is employed as an executive and his wife, Marie, is a self-employed realtor. Besides Bruce’s salary, Bruce and Marie own a warehouse that they rent to a local business for storage. This year they paid $1,250 for electric service in the warehouse. Marie also paid self-employment tax of $6,200 and Bruce had $7,000 of Social Security taxes withheld from his pay. Marie paid $45 fee to rent a safe deposit box to store records associated with her realty operation. Which of the following is a true statement?
Multiple Choice
One-half of the social security tax is deductible for AGI.
Only the electric bill is deductible for AGI.
The self-employment tax is not deductible.
The safe deposit fee and the electric bill are deductible for AGI.
The safe deposit fee and the electric bill are deductible for AGI.
Explanation
The safe deposit fee is a business expense and the electric bill is a rental expenses. The employer portion of the self-employment taxes is deductible for AGI.
Campbell, a single taxpayer, has $400,000 of profits from her general store that she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?
Multiple Choice $100,000. $80,000. $20,000. $1,000. $0.
$1,000.
Explanation
Her 20% qualified business deduction is limited to 25% of her wages ($0) plus 2.5% of her qualified property (2.5% x $40,000 = $1,000).
When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.
True or False
True
