Federal Taxation 134 Question Answers

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1. An ordinary expenditure is one which is commonly incurred by other businesses.

2. Hobby expenditures are deductible to the extent of hobby gross income.

3. If an employee accounts to the employer for business-related expenses and is reimbursed by the employer, the

expenses must still be reported on the employee’s tax return.

4. Job-seeking expenses are not deductible if an individual fi nds a job in a new trade or business.

5. Rents and royalties expenses are deductible from adjusted gross income.

6. Tax deductions for tax planning and tax compliance expenses may only be claimed for expenses incurred in planning

and compliance with respect to federal and state income taxed.

7. The Cohan case set a requirement for tax purposes that adequate substantiation is required for every tax deduction

claimed on a tax return.

8. Advertising which is intended to infl uence public reaction to proposed legislation normally is not a deductible

business expense for tax purposes.

9. The amount of a bad debt deduction is always limited to the adjusted basis of the debt in the hands of the taxpayer.

10. Full worthlessness of a debt must be proven in order to claim a business bad debt deduction.

11. A nonbusiness bad debt is always treated as a long-term capital loss for tax purposes.

12. Advance payments for employee services to be performed in future years are not deductible for tax purposes until the

services are actually performed by the employees.

13. Prepaid interest payments can be deducted in the year of payment regardless of whether the taxpayer uses the cash

method or accrual method of accounting.

14. Premiums paid on a life insurance policy covering the life of an offi cer are a tax deductible business expense if the

business is a direct or indirect benefi ciary under the policy.

15. In computing MACRS depreciation, salvage value is ignored.

16. To qualify for the immediate expensing election under Section 179, eligible property must generally be tangible real

property used in a trade or business and be eligible for MACRS.

17. Goodwill is subject to amortization for tax purposes.

18. Transportation expenses are defi ned for tax purposes as the costs of transporting an employee from one location to

another when the employee is not in a travel status.

19. Unreimbursed employee transportation expenses are deductible from AGI as miscellaneous itemized deductions.

20. In order to qualify for a moving expense deduction, it is necessary for a taxpayer to have a prior job location.

21. Personal expenses are only deductible if the tax laws specifically state that they are.

22. A necessary expense is one that is appropriate or helpful to the continuation of the taxpayer’s business; ordinary refers

to an expense that is customary and acceptable in the taxpayer’s type of business.

23. Amortization is the systematic recovery (expensing) of an investment in a productive natural resource.

24. The tax laws generally allow taxpayers to deduct expenses incurred while violating public policy, provided that the

expenditure is ordinary and necessary for the taxpayer’s trade or business.

25. Taxpayers can deduct ordinary and necessary expenses directly attributable to appearances before local legislative

councils in connection with legislation that will, or may be expected to, affect the taxpayer’s trade or business.

26. Start-up costs can include expenditures incurred to investigate entering into or acquiring a new active trade or

business.

27. Corporations can deduct the fi rst $5,000 of organizational costs incurred during the fi rst year of operations.

28. Acquisition costs a taxpayer incurs in the unsuccessful attempt to acquire a specifi c business cannot be deducted.

 

29. When a business borrows money to purchase tax-exempt bonds, the interest paid on the loan is not deductible.

30. Sales tax paid in connection with the purchase of property used in a business must be treated as part of the cost of the

property.

31. The research and experimental costs the taxpayer can elect to immediately expense include all such costs incident to

the development or improvement of a product.

32. A taxpayer can expense the cost of acquiring a site for a laboratory as well as the costs of constructing a laboratory.

33. The taxpayer’s domestic production activities deduction cannot exceed 25 percent of its W-2 wages.

34. If a debt becomes worthless, the amount allowed as a bad deduction is the adjusted basis of the debt.

35. Independent contractors are self-employed individuals who perform services for another individual or business entity

and are considered employees of the persons or businesses that hire them.

36. The portion of an employee’s salary deemed “unreasonable” may be considered a dividend distribution to an

employee that is also a shareholder of the corporation.

37. Amounts employers pay or reimburse employees for qualifi ed moving expenses are taxable to employees and

deducted by the employer.

38. Taxpayers cannot deduct the costs of tickets to any entertainment activity or facility regardless of whether or not the

taxpayer’s attendance at the activity is related to business.

39. A 50 percent deduction is allowed for amounts paid or incurred for dues and fees paid to social, athletic, sporting, or

country clubs.

40. A taxpayer can claim a transportation deduction equal to 55 cents per mile traveled in a passenger automobile for

business purposes.

41. The tax laws regarding depreciation allow taxpayers to write off the cost of tangible property over set periods

regardless of the actual useful life of the property.

42. The depreciable life of land is dependent on the type of buildings that have been, or will be, constructed on the land.

43. For tax purposes, an asset does not necessarily need to decline in value to be a depreciable asset.

44. The averaging convention that applies to depreciable property in the year in which it is placed in service is not

necessarily the same one used in the year is disposed of.

45. Trucks, SUVs, or vans having a gross vehicle weight rating between 6,000 and 14,000 pounds are not subject to the

annual depreciation limitations that apply to lighter vehicles.

46. Apartment buildings are an example of residential real property.

47. Cost depletion is computed based on the number of units sold during the year, regardless of the number of units

extracted.

48. Percentage depletion is computed without regard to the adjusted basis of the property being depleted.

49. Tangible assets are “depreciated;” intangible assets are “amortized.”

50. A Code Sec. 197 intangible is amortized based on its actual or estimated useful life.

 

51. Deductions for AGI are:

a. Always deductible

b. Deductible if they exceed the taxpayer’s standard deduction

c. A fl at allowance given to all taxpayers

d. Never deductible

52. To be deductible for tax purposes, trade or business expenses must be:

a. Ordinary and necessary

b. Reasonable in amount

c. Related to an activity which is deemed to be a trade or business

d. All of the above

53. To be deductible for tax purposes, a trade or business expenditure must be:

a. Ordinary

b. Necessary

c. Ordinary and necessary

d. Ordinary or necessary

54. Hobby expenditures are deductible to the extent of:

a. Total individual gross income

b. Hobby gross income

c. Trade or business gross income

d. Nonbusiness gross income

55. If an expenditure is part business-related and part personal:

a. The entire expenditure is deductible for tax purposes.

b. No part of the expenditure is deductible for tax purposes.

c. The personal portion of the expenditure may be deductible for tax purposes.

d. Only the business-related portion of the expenditure is deductible for tax purposes.

56. Fines and penalties paid to the government for the violation of a law are:

a. Generally deductible for tax purposes as business expenses

b. Not deductible for tax purposes

c. Deductible if ordinary and necessary

d. Deductible if reasonable in amount

57. Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in

the same trade or business:

a. Only if the individual actually fi nds a new job

b. Regardless of whether the individual fi nds a new job

c. If the expenses relate to the individual’s fi rst job

d. Both (a) and (b)

58. Dealers in illegal drugs can deduct:

a. All ordinary and necessary business expenses

b. Cost of goods sold

c. Fines and penalties paid to the government for the violation of a law

d. None of the above

59. Employment-related expenses of employees are:

a. Not allowed as trade or business tax deductions

b. Always deductible for AGI

c. Limited to two percent of AGI

d. Allowed as trade or business tax deductions

 

60. For tax purposes, nonbusiness expenses are:

a. Investment expenses

b. Tax planning expenses

c. Tax compliance expenses

d. All of the above

61. Which of the following investment related expenses are deductible for AGI?

a. Safe deposit box rentals

b. Investment counseling fees

c. Rent and royalty expenses

d. Investment custodial fees

62. Tax planning and compliance expenses incurred by individual taxpayers are not:

a. Deductible as nonbusiness expenses

b. Deductible as miscellaneous itemized deductions

c. Limited to the income tax area

d. Itemized deductions

63. For individual taxpayers, deductible losses for tax purposes do not include:

a. Business losses

b. Investment losses

c. Personal losses

d. Personal casualty or theft losses

64. Under the cash method of tax accounting, tax deductions are taken when:

a. Expenditures are made

b. There is a fi xed and determinable liability

c. The taxpayer elects to take the deduction

d. None of the above

65. The Cohan rule has to do with:

a. Tax accounting methods

b. Debts of another taxpayer

c. Substantiation of deductions

d. Cash method of accounting

66. For MACRS depreciation purposes, autos and light-duty trucks are depreciated over what period?

a. Three years

b. Five years

c. Ten years

d. Fifteen years

67. Business depreciable property placed in service prior to what year is not eligible for ACRS depreciation?

a. 1978

b. 1980

c. 1981

d. 1982

68. Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for

tax purposes over a period of not less than:

a. 30 months

b. 60 months

c. 90 months

d. 120 months

 

69. A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayer’s

taxable income derived from the natural resource for the year before deducting the depletion deduction?

a. 50 percent

b. 65 percent

c. 75 percent

d. 85 percent

70. A business tax deduction for business gifts is restricted to $25 per year per:

a. Individual donor

b. Salesman

c. Business establishment

d. Individual donee

71. For tax purposes, the term “research and experimentation expenditures” includes which of the following:

a. Effi ciency surveys

b. Development of a plant process

c. Management studies

d. Advertising

72. A business bad debt is deductible for tax purposes as a(n):

a. Short-term capital loss

b. Itemized deduction

c. Long-term capital loss

d. Ordinary business deduction

73. A nonbusiness bad debt is deductible for tax purposes as a(n):

a. Short-term capital loss

b. Itemized deduction

c. Long-term capital loss

d. Ordinary business deduction

74. A deduction for salaries and wages can include:

a. Bonus payments

b. Payments for services performed in prior years

c. Advance payments for services to be performed in future years

d. Both (a) and (b)

75. If rental payments are paid in advance, they are usually deductible by a taxpayer:

a. When paid

b. In the period covered by the payments

c. Over a one-year period

d. When paid or incurred as elected by the taxpayer

76. The IRS takes the position that a taxpayer’s tax home, for purposes of determining travel expenses, is at the location

of the taxpayer’s:

a. Principal place of business

b. Personal residence

c. Principal place of business or personal residence, whichever results in a lower tax deduction

d. Personal residence if located in excess of 50 miles from principal place of business

77. If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in

determining the taxpayer’s principal place of business: (Choose the wrong answer.)

a. Taxpayer’s preference for principal place of business

b. Degree of business activity at each location

c. Amount of income at each location

d. Amount of time spent at each location

 

78. Employee travel expenses are deductible:

a. For AGI

b. From AGI

c. For or from AGI depending on the type of travel expense

d. For AGI unless excess reimbursement is received

79. Travel expenses must be incurred by a taxpayer while away from home. To the IRS, the term “away from home” means:

a. Away from home for a 24-hour period

b. Away from home temporarily

c. Away from home overnight

d. Away from home for a reasonable period of time

80. In order to qualify for the moving expense deduction, the taxpayer:

a. Does not have to change job locations

b. Must move because of a new job location

c. Must have a prior job location

d. Must change employers

81. Trade or business expenses are only deductible if they are:

a. necessary and ordinary.

b. reasonable in amount.

c. not capital in nature.

d. Only a and b.

e. All of the above.

82. An example of an expense not allowed as a deduction under Code Sec. 162(a) would be:

a. a speeding ticket.

b. an expense incurred while operating an illegal gambling business.

c. a government imposed penalty.

d. both a and c.

e. all of the above.

83. Costs incurred in investigating the creation or acquisition of an active trade or business are classifi ed as:

a. acquisition costs.

b. start-up costs.

c. organizational expenditures.

d. none of the above.

84. Which of the following types of taxes is not deductible?

a. State property taxes.

b. State income taxes.

c. Federal income taxes.

d. All of the above types of taxes are deductible.

85. The tax laws allow taxpayers to use which of the following methods of accounting for research and experimental

costs paid or incurred in connection with a trade or business?

a. Deduct the expenses in the year in which they are paid or incurred.

b. Capitalize the expenses and amortize them ratably over a period of at least 60 months beginning in the month that

the benefi ts are fi rst realized.

c. Capitalize the expenses, but do not amortize them.

d. All of the above.

86. Nonbusiness bad debts are deductible:

a. as short-term capital losses.

b. in full against business gross income.

c. only when they become wholly or partially worthless.

d. a and c are both correct.

 

87. Deductions for business gifts are limited to what amount per individual each year?

a. $25

b. $250

c. $2,500

d. None of the above

88. During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market

values:

7 gifts of property valued at $10 each

5 gifts of property valued at $20 each

13 gifts of property valued at $50 each

How much can the taxpayer deduct for business gifts?

a. $312.50

b. $495.00

c. $625.00

d. $247.00

89. Research and experimental expenditures connected with a trade or business can be capitalized and amortized for tax

purposes over a period of not less than:

a. 30 months

b. 60 months

c. 120 months

d. 180 months

90. A calendar-year corporation incurs $53,000 of start-up costs. If the corporation began business on August 1 of the

current year, what is the maximum amount of the start-up costs that it can deduct against business income in the

current year?

a. $1,472

b. $4,417

c. $6,250

d. $3,417

e. none of the above

91. During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The

corporation elects to capitalize and amortize the costs over 60 months. If the corporation fi rst realizes benefi ts from

the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal:

a. $4,633

b. $3,544

c. $2,217

d. $1,733

92. PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on

November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return?

a. $625

b. $1,250

c. $7,500

d. $15,000

93. HMP Inc. reported the following information:

Net sales (U.S. production) $550,000

Cost of goods sold 300,000

Operating expenses 100,000

W-2 wages for the year(included in cost of goods sold and

operating expenses) 80,000

 

What is HMP’s taxable income?

a. $141,000

b. $145,500

c. $150,000

d. $154,500

94. Moving expenses qualify as deductions if:

a. the employee’s commute to the new job increases by at least 50 miles (before moving).

b. the employee is employed full-time in the new location for at least 39 of the fi rst 52 weeks after the move.

c. both a and b.

d. none of the above.

95. Taxpayers generally can deduct meal and entertainment expenses provided that the expenses are:

a. less than fi ve percent of the employer’s gross profi ts.

b. directly related to or associated with the taxpayer’s trade or business.

c. spent solely on employees.

d. none of the above.

96. Expenses that are costs paid or incurred while traveling around town on business are known as:

a. travel expenses.

b. transportation expenses.

c. relocation expenses.

d. none of the above.

97. A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club:

Annual dues $1,000

Personal meals 1,500

Business meals 2,500

What amount can the attorney deduct against business income on his personal tax return?

a. $0

b. $1,250

c. $1,750

d. $2,250

e. $2,500

98. An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting

business and three days sightseeing and visiting friends. His expenses included:

Airfare $ 800

Lodging (10 days at $280) 2,800

Meals (10 days at $100) 1,000

Entertainment of friends 250

$4,850

The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualifi es as

deductible travel expenses for the corporation?

a. $3,220

b. $3,460

c. $3,110

d. $4,100

e. $3,395

 

99. If a taxpayer drives 10,000 business miles during 2009, and uses the standard mileage method, the taxpayer’s

deduction is:

a. $4,900

b. $2,400

c. $4,750

d. $5,500

e. none of the above

100. Susanne Watson is an employee and sole-shareholder of Klaxon. Klaxon is a calendar-year company which uses the

accrual method of accounting. On December 30, 2009, Klaxon awarded Susanne a bonus of $30,000 based on the

company’s 2008 year-end profi t. The bonus was reasonable, ordinary and necessary. It was paid on February 11, 2010.

In what year can Klaxon deduct the bonus it paid to Susanne? Susanne is a calendar-year, cash method taxpayer.

a. 2008

b. 2009

c. 2010

d. The bonus cannot be deducted by Klaxon, Inc.

101. The process used to recover the cost of intangible assets over time is known as:

a. amortization

b. depletion

c. depreciation

d. none of the above

102. “Depletion” is defi ned as:

a. the taxpayer’s use and reduction of natural resources.

b. the method by which the cost of natural resources is recovered.

c. the deduction taken to recover the costs of regulating the use of natural resources.

d. none of the above.

103. Code Sec. 179 allows certain taxpayers to:

a. immediately expense certain depreciable personal property placed in service during the year rather than

depreciate it over several tax years.

b. immediately expense certain depreciable real and personal property placed in service during the year rather than

depreciate it over several tax years.

c. immediately expense certain depreciable personal property placed in service during the year in addition to

depreciating it over several tax years.

d. immediately expense certain depreciable real and personal property placed in service during the year in addition

to depreciating it over several tax years.

104. The two types of depletion methods are:

a. accelerated depletion and percentage depletion.

b. cost depletion and percentage depletion.

c. unit depletion and percentage depletion.

d. none of the above.

105. Last year, a corporation purchased an offi ce building for $220,000, of which $30,000 was allocated to the land on

which the building was located. The building’s salvage value was estimated to be $50,000. The corporation’s current

year depreciation deduction for the building is:

a. $3,590

b. $4,872

c. $5,641

d. $6,909

106. During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the

only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the

corporation can claim under Code Sec. 179 in 2009 is:

a. $250,000

b. $25,000

c. $133,000

d. $450,000

107. Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of

this amount, $50,000 was allocated to the underlying land. What is the corporation’s allowable depreciation deduction

for the current year under MACRS?

a. $5,000

b. $5,128

c. $6,350

d. $7,272

108. Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current

year. Current year depreciation expense with respect to the real estate will be:

a. $2,244

b. $1,603

c. $2,273

d. $1,973

e. $7,692

109. Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is

depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention

applies to all fi ve-year property placed in service this year, what will be depreciation expense with regard to this

property for the current year? (Ignore bonus depreciation.)

a. $625

b. $5,000

c. $4,375

d. $3,045

e. $2,500

110. During 2009, Klecker, Inc. placed in service $865,000 of Code Sec. 179 property. How much can Klecker elect to

immediately expense in 2009?

a. $185,000

b. $133,000

c. $98,000

d. $250,000

111. This year, Ellen Smith converted her principal residence to rental property. She originally purchased the home 8

years ago for $425,000. The home was appraised at $356,250 just before she placed it on the rental market. Assuming

that $12,500 of the tax basis of the home is attributable to the land on which the home is located, if the home was

converted to rental property on June 20, how much depreciation expense can Ellen claim on her current year return?

a. $8,125

b. $6,771

c. $4,774

d. $5,729

 

112. During 2009, Fred Reardon incurred the following expenditures in connection with his coin collecting

activities:

Travel expenses $10,000

Purchase of coins still held at end of year 11,000

Cost of coins sold during year 9,000

Total $30,000

Fred received $16,000 for the coins sold during the year.

(a.) If Fred’s coin collecting activities are considered to be a hobby for tax purposes, what related

expenditures are deductible on his 2009 tax return? Show computations and explain in detail.

(b.) If Fred’s coin collecting activities are considered to be a trade or business for tax purposes, what

related expenditures are deductible on his 2009 tax return? Show computations and explain in detail.

113. During 2009, Chester Pry used his personal car for both business and personal purposes. During the year,

he drove 5,000 miles on business-related trips and 7,000 miles for personal purposes. He incurred $6,500

of car expenses during the year. Based on this information, what amount of the car expenses are deductible

as business-related expenses on Chester’s 2009 tax return? Show computations.

114. Are any of the following items deductible on an individual’s income tax return? If so, would the item be

deductible “for” or “from” AGI? Explain each item.

(a.) Loss on sale of car used for personal purposes

(b.) Payment of a speeding fi ne relating to personal activity

(c.) Uninsured storm damage on personal residence

115. Would any of the following items be deductible on an individual’s income tax return? If so, would the item

be deductible “for” or “from” AGI? Explain each item.

(a.) Hobby expenditures of $2,000 in excess of hobby gross income.

(b.) A $3,000 loss on the sale of a personal sailboat.

(c.) Interest of $8,000 on money borrowed to purchase tax-exempt securities.

(d.) A $6,000 unrealized decline in the value of stock held in an individual’s investment portfolio.

116. Are any of the following items deductible on an individual’s income tax return? If so, is the item deductible

“for” or “from” AGI? Explain each item.

(a.) Payment of a $100 speeding fi ne related to a trade or business.

(b.) A cost of $145 for having a federal income tax return prepared by an accountant.

(c.) A legal fee of $890 for estate planning advice of which 50 percent related to tax planning advice.

117. Compute regular MACRS depreciation for the following qualifi ed assets. (Ignore Section 179 deduction.)

(a.) Business equipment purchased in February for $35,000 which has a salvage value of $5,000.

(b.) Business car purchased in May for $22,000 which has a salvage value of $3,000.

118. Compute regular MACRS depreciation for an apartment building (residential real estate) purchased in

January for $235,000 with a salvage value of $20,000.

119. Compute regular MACRS depreciation for the following qualifi ed assets purchased during 2009 (Ignore

Section 179 deduction):

(a.) Offi ce equipment purchased in 2009 for $25,000 which has a salvage value of $5,000.

(b.) Offi ce building purchased in October 2009 for $90,000 which has a salvage value of $10,000.

120. Assume a calendar year taxpayer, using MACRS, elects optional straight- line depreciation over the

shortest possible recovery period for the following assets. Compute 2009 depreciation for each of the assets

listed. (Ignore Section 179 deduction.)

(a.) Business equipment purchased in 2009 for $45,000 with a salvage value of $5,000.

(b.) Offi ce furniture purchased in January 2009 for $100,000 with an estimated salvage value of $5,000.

 

121. In 2009, Mason Container Co., a calendar year taxpayer, purchased business equipment for $350,000.

Mason wants to take the largest possible tax deduction in 2009 related to this property. Compute the largest

tax deduction possible in 2009 related to this business equipment. (Consider Section 179 deduction.)

122. In January, Arco Company purchases the rights to a natural resource for $3,000,000. The estimated

recoverable units from the natural resource amount to 3,000,000 units. During the year, Arco sold 100,000

units of the natural resource at $6 per unit and incurred operating costs other than depletion of $4.50 per

unit. Assume a 15 percent specifi ed depletion percentage. Based on these facts, compute the company’s

depletion deduction using both cost depletion and percentage depletion and choosing the higher fi gure.

123. This year, Martha Vance drove her personal car 3,600 miles for business purposes and incurred $180 in

parking fees, $210 in highway tolls, and $350 for automobile insurance premiums. She received $800

reimbursement from her employer for automobile expenses. Compute Martha’s deduction for automobile

expenses on her current year tax return, assuming all of the above expenses are valid and she elects to use

the standard mileage allowance method to fi gure her automobile expenses.

124. Harry Simms travels from Los Angeles to Cleveland on a business trip. Three days of the trip are spent

conducting business activities and one day is spent on personal sightseeing activities. Harry incurs $700

in airfare costs in going to and returning from Cleveland and $150 a day in expenses for qualifi ed meals

and lodging while in Cleveland. Harry receives an $800 reimbursement from his employer for these travel

costs. What amount is deductible on Harry’s tax return for travel expenses related to the above activities?

125. Jim Bender incurs the following moving expenses:

Moving household goods $600

Temporary living expenses in new location 400

Real estate commission on sale of old home 2,900

Total moving expenses $3,900

Jim does not get a reimbursement from his employer. What is Jim’s moving expense deduction on his

federal income tax return?

126. Which of the following are capital expenditures and which are ordinary and necessary business expenses?

(a.) Costs incurred to make improvements to a building to make it accessible to handicapped citizens as

mandated by federal law.

(b.) Costs incurred to convert an offi ce building into a night club.

(c.) Costs incurred to train new employees.

(d.) Costs to repair a leak in the roof of an offi ce building.

127. Joshua Stark, a realtor, paid $5,000 to Shady Grove Apartments, Inc. as a referral fee for referring

customers to him. One of his competitors complained to the local Realtor’s Board that these payments were

“kickbacks,” deemed unethical conduct by the Board. The Board agreed with his competitor, but noted that

the payments were not illegal under federal law, and local laws against such fees have not been enforced

for several years. Thus, the Board indicated that it would write a letter to Joshua explaining its view that

the payments are unethical, but that there was really little else that either it or the competitor could do.

Joshua countered to the Board that he would prefer not to make the payments, but that such payments are a

common practice among realtors in the city, and that his business would suffer if he did not make them as

well. Can Joshua deduct the payments on his federal income tax return?

128. New Era Corporation’s books, which are maintained on the cash basis, show the following income and

expense items for the current year:

Net sales $500,000

Cost of goods sold (200,000)

Selling and marketing expenses ( 50,000)

General and administrative expenses allocable to production ( 30,000)

General and administrative expenses allocable to sales marketing (15,000)

W-2 wages for the year (105,000)

What is New Era’s taxable income?

 

129. Sara Tripper is a sole proprietor with two employees, Jake and Nancy. Sara decides to relocate her business

from Kenton to Westchester, and Jake and Nancy agree to relocate as well. All three decide to move their

families to Westchester. Sara agreed to reimburse Jake and Nancy for their moving expenses.

(a.) Nancy’s old residence was 13 miles from the old job location, and the new job location is 61 mile from

her old residence. After the move, Nancy worked full-time for the next two years. What are the federal

income tax consequences for Nancy and Sara regarding the reimbursement of Nancy’s moving expenses?

(b.) Jake’s old residence was eight miles from the old job location, and the new job location is 60 miles

from his old residence. After the move, Jake worked full-time for the fi rst 52 weeks, but he worked

only part-time after that. What are the federal income tax consequences for Jake and Sara regarding the

reimbursement of Jake’s moving expenses?

(c.) Sara’s old residence was 10 miles from the old job location, and the new job location is 75 miles from

her old residence. After the move, Sara worked full-time for the next 52 weeks; however, she only worked

full-time 20 of the next 52 weeks. What are the federal income tax consequences to Sara regarding her

qualifi ed moving expenses?

130. Erica Garcia and Lance Trout are regularly employed by a company in Phoenix. During the current year,

both accepted work for the company in another city located 250 miles from Phoenix. Erica realistically

expected her work to last about 18 months. However, the work was completed in 10 months and she

returned to Phoenix. Lance, on the other hand, realistically expected his work in the other city to be

completed in nine months when he took the job. However, after eight months, he was asked to remain for

seven more months. His total work assignment lasted 15 months.

(a.) Are Erica’s travel expenses deductible? Explain.

(b.) Are Lance’s travel expenses deductible? Explain.

131. Which of the following vehicles is subject to the luxury car depreciation limits if used for business

purposes?

A pickup truck with a gross vehicle weight rating of 6,000 pounds.

A van with an unloaded gross vehicle weight of 5,000 pounds.

An ambulance.

An SUV (sports utility vehicle) with a gross vehicle weight rating of 10,000 pounds that is built on a truck

chassis.

132. Steve Edwards Enterprises is a sole proprietorship. It is planning to purchase a signifi cant amount of

property this year, all of which will be classifi ed as 5-year property for purposes of MACRS depreciation.

It would like to know the difference in the total fi rst- and second-year depreciation deductions resulting

from the two cost acquisition patterns outlined below: (Ignore bonus depreciation and the Section 179

deduction.)

Property Acquisition Dates Plan A Plan B

1/28 $250,000 $ 75,000

5/15 120,000 250,000

10/6 180,000 225,000

$550,000 $550,000

134. S&G Mining Corporation purchased a mine that is estimated to hold 500,000 tons of ore for $1,000,000.

During the fi rst year, 50,000 tons were extracted and 40,000 tons were sold. In the second year, 60,000 tons

were extracted and 50,000 tons were sold. Estimates of the amount of ore held by the mine at the end of the

 

fi rst year were revised to 670,000 tons. Compute cost depletion for the fi rst two years.