Taxation in the United States and Deduction

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CHAPTER 6--DEDUCTIONS AND LOSSES: IN GENERALCHAPTER 6--DEDUCTIONS AND LOSSES: IN GENERAL Student: ___________________________________________________________________________ 1. A taxpayer who claims the standard deduction cannot also deduct expenses that are classified as deductions from AGI. True False

2. Mitch is in the 28% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI. True False

3. Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI. True False

4. All employment related expenses are classified as deductions for AGI. True False

5. The only § 212 expenses that are deductions for AGI are those related to rent and royalty income. True False

6. Alice incurs qualified moving expenses of $12,000. If she is reimbursed by her employer, the deduction is classified as a deduction for AGI. If not reimbursed, the deduction is classified as an itemized deduction. True False

7. Expenses incurred for the production or collection of income generally are deductions from adjusted gross income. True False

8. The Code defines what constitutes a trade or business.
True False

9. For an expense to be deducted as ordinary, it must be recurring in nature. True False

10. Amos, a shareholder-employee of Pigeon, Inc., receives a $400,000 salary. The IRS classifies $125,000 of this amount as unreasonable compensation. The effect of this reclassification is to decrease Amos’ gross income by $125,000 and increase Pigeon’s gross income by $125,000. True False

11. A salary that is classified as unreasonable by the IRS is disallowed as a deduction to the corporation. True False

12. Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income. True False

13. Under no circumstance can a loss on the sale of a personal use asset be deducted. True False

14. The income of a sole proprietorship are reported on Schedule C (Profit or Loss from Business). True False

15. The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business. True False

16. Because it has only one owner, any sole proprietorship is permitted to elect the cash method of accounting. True False

17. A cash basis taxpayer who charges an expense on a bank credit card is allowed to claim a deduction currently, whereas a cash basis taxpayer who charges an expense on a department store credit card is not allowed to claim a deduction until payment is made. True False

18. Under the “one-year rule” for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment. True False

19. None of the prepaid rent paid on November 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period. True False

20. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests. True False

21. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer. True False

22. All domestic bribes (i.e., to a U.S. official) are disallowed as deductions. True False

23. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business. True False

24. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 “grease” payment to a U.S....
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