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Exam 5: Business Deductions

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Question 31

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MACRS depreciation is used to compute earnings and profits.

A) True
B) False

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Question 32

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Rustin bought used 7-year class property on May 15, 2016, for $728,000. Rustin elects § 179 and straight-line cost recovery. Rustin's taxable income would not create a limitation for purposes of the § 179 deduction. Determine the maximum cost recovery deduction Rustin can claim for 2016.

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Question 33

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Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.

On January 15, 2016, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2016 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2016.

Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct these political contributions?

Sid bought a new $1,210,000 seven-year class asset on August 2, 2016. On December 2, 2016, he purchased $860,000 of used five-year class assets. If Sid elects § 179 and takes additional first-year depreciation, if available, what is the maximum cost recovery deduction for these purchases for 2016?

Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.

On December 28, 2015, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation, authorized a contribution of land to a qualified charitable organization. The land (basis of $75,000, fair market value of $125,000) was acquired five years ago and held as an investment. For purposes of the taxable income limitation applicable to charitable deductions, Taupe has taxable income of $800,000 and $950,000 for 2015 and 2016, respectively. Describe the tax consequences to Taupe Corporation under the following independent situations. a.The donation is made on February 16, 2016. b.The donation is made on April 11, 2016.

Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:

Max opened his dental practice (a sole proprietorship) in March 2016. At the end of the year, he has unpaid accounts receivable of $62,000 and no unpaid accounts payable. Should Max use the accrual method or the cash method for his dental practice?

Discuss the criteria used to determine whether a building is residential or nonresidential realty. Also explain the tax consequences resulting from this determination if the property is placed in service in 2016.

Blue Corporation incurred the following expenses in connection with the development of a new product: Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year.

Which of the following may be deductible?

Graham, a CPA, has submitted a proposal to do the annual audit for a municipality. Owen, the city treasurer, tells Graham that for a $1,000 fee, he will use his influence to have the audit awarded to Graham. What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?

Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S. citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible, while that by Jacques is not.

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2016, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should:

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

For personal property placed in service in 2016, the § 179 maximum deduction is limited to $500,000.

Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.

In 2015, Gail had a § 179 deduction carryover of $30,000. In 2016, she elected § 179 for an asset acquired at a cost of $115,000. Gail's § 179 business income limitation for 2016 is $140,000. Determine Gail's § 179 deduction for 2016.