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Exam 6: Deductions and Losses: in General

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Question 41

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Tracy invested in the following stocks and bonds during 2019. $\begin{array}{lr}\text { Blue, Inc. } & \$ 25,000 \\\text { City of Falcon bonds } & 75,000\end{array}$ To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2019 was $5,000. During 2019, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on the municipal bonds. a. Determine the amount of Tracy's gross income. b. Determine the maximum amount of Tracy's deductible interest expense.

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interest on the municipal bonds of $3,00...

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Question 42

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Bridgett's son, Clyde, is $12,000 in arrears on his residential mortgage payments. Of the $12,000, $7,500 represents interest and $4,500 represents principal. a. If Bridgett pays the $12,000 to the lender, how much can she deduct? How much can Clyde deduct? b. If Bridgett pays the $7,500 of interest to the lender and lends or gives $4,500 to Clyde, who pays the $4,500 of principal, how much can Bridgett deduct? How much can Clyde deduct? c. If Bridgett gives or lends the $12,000 to Clyde who pays the lender, how much can he deduct? How much can Bridgett deduct? d. Advise Bridgett and Clyde on how the payment should be made.

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a. A deduction cannot be taken for payin...

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Question 43

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Which of the following are deductions for AGI?

Investigation of a business unrelated to one's present business never results in a current-period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Which of the following is a required test for the deduction of a business expense?

A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby- related expenses.

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

Calculate the net income includible in taxable income for the following hobby in 2019: $\begin{array} { l r } \text { Income } & \$ 23,000 \\\text { Mortgage interest and property taxes allocable to hobby } & 12,000 \\\text { Depreciation } & 4,000 \\\text { Supplies and fees } & 7,000 \\\text { Telephone for hobby } & 3,000\end{array}$

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.

Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1) the business is not acquired or (2) the business is acquired?

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 lossof Marge).

Cory incurred and paid the following expenses in 2019: $\begin{array}{lr}\text { Tax return preparation fee } & \$ 600 \\\text { Moving expenses } & 2,000 \\\text { Investment expenses } & 500 \\\text { Expenses associated with rental property } & 1,500 \\\text { Interest expense associated with loan to finance tax-ex empt bonds } & 400\end{array}$ Calculate the amount that Cory can deduct (before any percentage limitations) .

During the year, Rita rented her vacation home for 12 days for $2,400 and she used it personally for three months. The following expenses were incurred on the home: $\begin{array}{lr}\text { Property taxes } & \$ 2,200 \\\text { Mortgage interest } & 10,800 \\\text { Utilities and maintenance } & 1,900 \\\text { Depreciation } & 5,000 \\\text { Insurance } & 900\end{array}$ Calculate her rental gain or loss and itemized deductions.

Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During 2019 she sold the bedspreads for $10,000. She incurred expenses as follows: $\begin{array}{lr}\text { Supplies }&\$4,000\\\text { Interest on loan to get business started } & 500 \\\text { Advertising } & 6,500\end{array}$ Assuming that the activity is deemed a hobby, how should she report these items on her tax return?

Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced his practice on February 1, 2019. In order to guarantee no rent increases during an 18-month period, he signed an 18- month lease and prepaid the $90,000 on February 1, 2019. How much can Taylor deduct as rent expense for 2019?

Petula's business sells heat pumps that have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2019, heat pump sales are $400,000. Actual warranty expenses paid in 2019 are $40,000. a. Determine the amount of the warranty expense deduction for 2019 if Petula's business uses the accrual method. b. How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties that covered the second and third years of ownership?

Under the 12-month 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.

During the year, Martin rented his vacation home for three months and spent one month there. Gross rental income from the property was $5,000. Martin incurred the following expenses: mortgage interest, $3,000? real estate taxes, $1,500? utilities, $800? maintenance, $500? and depreciation, $4,000. Compute Martin's allowable deductions for the vacation home under the court's approach and the IRS's approach.

Martha rents part of her personal residence in the summer for three weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.

Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000. Beulah converts the property to rental use this year. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.