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Exam 5: Business Deductions

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Question 61

True/False

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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.

A) True
B) False

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Question 62

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Cora purchased a hotel building on May 17, 2017, for $3,000,000.Determine the cost recovery deduction for 2018.

A) $48,150
B) $59,520
C) $69,000
D) $76,920
E) None of the above

F) D) and E)
G) A) and C)

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Question 63

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Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.

For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.

Rod paid $1,950,000 for a new warehouse on April 14, 2017.He sold the warehouse on September 29, 2022.Determine the cost recovery deduction for 2017 and 2022.

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.

A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense.If the same amount is paid to the CEO of IBM, only $1 million is deductible.

The stock of Eagle, Inc.is owned as follows: $\begin{array} { l r } \text { Tom } & 23 \% \\\text { Tom's uncle } & 22 \% \\\text { Tom's daughter } & 7 \% \\\text { Tom's sister } & 15 \% \\\text { Tom's spouse } & 15 \% \\\text { Tom's nephew } & 8 \% \\\text { Tom's CPA, unrelated } & 10 \%\end{array}$ 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.

On March 3, 2017, Sally purchased and placed in service a building costing $12,000,000.The building has 10 floors.The bottom three floors are rented out to businesses.The top seven floors are residential apartments.The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000.Determine Sally's cost recovery for the building in 2017.

The cost of depreciable property is not a research and experimental expenditure.

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. $\begin{array} { l r r } & \text { Terry } & \underline { \text { Jim } } \\\text { Employee salaries } & \$ 200,000 & \$ 200,000 \\\text { Bribes to police } & 25,000 & 25,000 \\\text { Rent and utilities } & 50,000 & 50,000 \\\text { Cost of goods sold } & - 0 - & 125,000\end{array}$ Which of the following statements is correct?

On June 1, 2017, Norm leases a taxi and places it in service.The lease payments are $1,000 per month.Assuming the dollar amount from the IRS table for such leases is $241, determine Norm's gross income inclusion amount.

Blue Corporation incurred the following expenses in connection with the development of a new product: $\begin{array} { l r } \text { Salaries } & \$ 100,000 \\\text { Utilities } & 18,000 \\\text { Materials } & 25,000 \\\text { Advertising } & 5,000 \\\text { Market survey } & 3,000 \\\text { Depreciation on machine } & 9,000\end{array}$ 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.

On June 1, 2017, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000.She used the assets 40% for business, 50% for the production of income, and 10% for personal use.These are the only assets Gabriella purchased during the current year.Determine her total cost recovery deduction for the current year.

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

In 2017, Tan Corporation incurred the following expenditures in connection with the development of a new product: $\begin{array} { l r } \text { Salaries } & \$ 60,000 \\\text { Supplies } & 20,000 \\\text { Depreciation on research equipment } & 10,000 \\\text { Testing for quality control } & 5,000 \\\text { Advertising } & 8,000 \\\text { Overhead allocated to research } & 2,000\end{array}$ ? Tan began selling the product in November 2017.If Tan elects to amortize research and experimental expenditures, determine Tan's deduction for 2017.

Augie purchased one new asset during the year (five-year property) on November 10, 2017, at a cost of $660,000.She would like to use the § 179 election and will also take additional first-year depreciation.The income from the business before the cost recovery deduction and the § 179 deduction was $600,000.Determine the total cost recovery deduction with respect to the asset for 2017.

Audra acquires the following new five-year class property in 2017: $\begin{array} { l l r } \text { Asset } & \text { Acquisition Date } & \text { Cost } \\\text { A } & \text { January 10 } & \$ 106,000 \\\text { B } & \text { July 5 } & 70,000 \\\text { C } & \text { November 15 } & \underline { 1,950,000 } \\\text { Total } & & \$ 2,126,000 \\\end{array}$ Audra elects § 179 treatment for Asset C.Audra's taxable income from her business would not create a limitation for purposes of the § 179 deduction.Audra claims the full available additional first-year depreciation deduction.Determine her total cost recovery deduction (including the § 179 deduction) for the year.

On June 1 of the current year, Tab converted a machine from personal use to rental property.At the time of the conversion, the machine was worth $90,000.Five years ago Tab purchased the machine for $120,000.The machine is still encumbered by a $50,000 mortgage.What is the basis of the machine for cost recovery?

During 2016, 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 2017.What is the amount of the deduction for salary expense?