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Exam 5: Business Deductions

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Question 81

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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.

A) True
B) False

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Question 82

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

A) True
B) False

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Question 83

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Cream, Inc.'s taxable income for the current year before any deduction for an NOL carryforward of $30,000 is $70,000. Cream's qualified production activities income (QPAI) is $60,000. What is the amount of Cream's domestic production activities deduction (DPAD) for the current 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.

George purchases used seven-year class property at a cost of $200,000 on April 20, 2016. Determine George's cost recovery deduction for 2016 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation, if available.

Bobby operates a drug trafficking business. Because he has an accounting background, he keeps detailed financial records. What expenses can Bobby deduct on his Federal income tax return?

Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary. The IRS classifies $100,000 of this amount as unreasonable compensation. The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.

Nora purchased a new automobile on July 20, 2015, for $29,000. The car was used 60% for business and 40% for personal use. In 2016, the car was used 30% for business and 70% for personal use. Nora elects not to take additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction for 2016.

White Company acquires a new machine (seven-year property) on January 10, 2016, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2016 assuming White has taxable income of $800,000.

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2015 of $5,000. In 2016, Heron made a further charitable contribution of $20,000. Heron's 2016 deduction is limited to $15,000 (10% of taxable income). The 2016 contribution must be applied first against the $15,000 limitation.

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Which of the following statements is correct?

Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To provide Olive with funds to acquire additional working capital, the shareholders each loan Olive $100,000 with a 6% interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

During 2014, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2015. What is the amount of the deduction for salary expense?

The cost recovery period for 3-year class property is 4 years.

Bruce owns several sole proprietorships. Must Bruce use the same accounting method for each of these businesses?

Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge).

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

The stock of Eagle, Inc. is owned as follows: Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate Tom's realized and recognized loss associated with the sale.

Tom purchased and placed in service used office furniture on January 3, 2016, for $40,000. Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The accountant also used the same depreciation amounts when filing Tom's income tax returns. On January 10, 2021, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

Polly purchased a new hotel on July 20, 2016, for $6,000,000. On January 20, 2023, the building was sold. Determine the cost recovery deduction for the year of the sale.