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Income Tax Final Chapter 6

Classify each of the following expenditures as a deduction for AGI, a deduction from AGI, or not deductible. Ignore any possible limitations.
a. Sam gives $5,000 to his father as a birthday gift.
b. Sandra gives $1,000 to her church.
c. Albert pays Dr. Dafashy $500 for medical services rendered.
d. Mia pays alimony of $12,000 to Bill.
e. Rex, who is self-employed, contributes $1,000 to his pension plan.
f. April (the landlord) pays expenses of $500 associated with her rental property.
Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2013 by buying $65,000 worth of supplies for his business on December 27, 2013. The supplies will be used up in 2014.
a. Can Aubry deduct the expenditure for 2013?
b. If Aubry had bought the supplies because the seller was going out of business and offered a large discount on the price, can he deduct the expenditure for 2013?
the developing country
Ted, an agent for an airline manufacturer, is negotiating a sale with a representative of the U.S. government and with a representative of a developing country. Ted’s company has sufficient capacity to handle only one of the orders. Both orders will have the same contract price. Ted believes that if his employer authorizes a $500,000 payment to the representative of the foreign country, he can guarantee the sale. He is not sure that he can obtain the same result with the U.S. government.
-What country offers the best tax advantages for Ted?
-If Ted makes a payment to the representative of the U.S. government, is it deductible?
-If Ted makes a payment to the representative of the foreign government, is it deductible?
c.) deductible
rest are not deductible
Linda operates a drug-running operation. Indicate whether the following expenses are deductible or not deductible in determining taxable income.
a. Bribes paid to border guards.
b. Salaries to employees.
c. Price paid for drugs purchased for resale.
d. Kickbacks to police.
e. Rent on an office.
f. Depreciation on office furniture and equipment.
g. Tenant’s casualty insurance.
h. Utilities.
the same/ similar to his business
not a restaurant, and did not acquire it
amortized over 180 moths
Paul operates a restaurant in Cleveland. He travels to Columbus to investigate acquiring a business. He incurs expenses as follows: $1,500 for travel, $2,000 for legal advice, and $3,500 for a market analysis. Based on the different tax consequences listed below, describe the circumstances that were involved in Paul’s investigation of the business.
a. Paul deducts the $7,000 of expenses. He must be investigating a business that is .
b. Paul cannot deduct any of the $7,000 of expenses. He must be investigating a business that is .
c. Paul acquired a business outside the restaurant industry. He can deduct $____ of the expenses and the balance is___.
net loss
Hobby/Business (LO. 3)
Harold conducts a business with the following results for the year:
Revenue $20,000
Depreciation on car 3,960
Operating expenses of car 3,100
Rent 6,000
Wages 8,200
Amortization of intangibles 680

Harold estimates that due to a depressed real estate market, the value of land owned by the business declined by $5,200.
a. Harold’s business has a____of $____which is reported ____on his tax return.

1,500 FROM AGI
10,000 FROM AGI
Sarah owns a vacation cabin in the Tennessee mountains. Without considering the cabin, she has gross income of $65,000. During the year, she rents the cabin for two weeks for $2,500 and uses it herself for four weeks. The total expenses for the year are $10,000 mortgage interest; $1,500 property tax; $2,000 utilities, insurance, and maintenance; and $3,200 depreciation.
If an amount is zero, enter “0”.
a. What effect does the rental of the vacation cabin have on Sarah’s AGI?
Sarah reports rental income of $____and rental expenses of $____for AGI.
b. What expenses can Sarah deduct, and how are they classified (i.e., for or from AGI)? You may assume that she itemizes her deductions.
a. Utilities $
b. Insurance $
c. Property Taxes $
d. Mortgage interest $
e. Maintenance expenses $
Under what circumstances may a taxpayer deduct a rental loss associated with a vacation home?
For a rental loss on a vacation home to be deductible, the property must be rented for____ days or more during the year and must not be used for personal purposes for more than the greater of___ days or___of the rental days.
Karen and Andy own a beach house. They have an agreement with a rental agent to rent it up to 200 days per year. For the past three years, the agent has been successful in renting it for 200 days. Karen and Andy use the beach house for one week during the summer and one week during Thanksgiving. Their daughter, Sarah, a college student, has asked if she and some friends can use the beach house for the week of spring break. Advise Karen and Andy how they should respond, and identify any relevant tax issues.
If the residence is rented for____ days or more in a year and is not used for personal purposes for more than the___ of____days or____% of the total days rented, the residence is treated as rental property. The expenses must be allocated between personal and rental days if there are any personal use days during the year.
In prior years, the beach house has been classified as ___ property, since the personal use did____ the limits outlined above. Thus, if the total available deductions exceeded the rental income, the loss____deducted on Karen and Andy’s tax return.
-If Sarah is permitted to use the beach house for one week, the total personal use of beach house___ the statutory limit. In this case, the deductions are ____.
Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret’s interest payments on the loan this year are $4,900, and his principal payments are $1,100.
a. How much reportable interest income does Jarret have this year?
b. How much can Jarret deduct as interest expense this year?

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