CHAPTER 6 DEDUCTIONS AND LOSSES: IN GENERAL

1. Deductions are
allowed unless a specific provision in the tax law provides otherwise.
a. True
b. False

2. Mitch is in the 28%
tax bracket. He may receive a different tax benefit for a $2,000 expenditure
that is classified as a deduction fromAGI
than he will receive for a $1,000 expenditure that is classified as a deduction
forAGI.
a. True
b. False

.

3. Depending on the
nature of the expenditure, expenses incurred in a trade or business may be
deductible foror from AGI.
a. True
b. False

4. Only some employment
related expenses are classified as deductions forAGI.
a. True
b. False

5. Section 212 expenses
that are related to rent and royalty income are deductions forAGI.
a. True
b. False

6. Alice incurs
qualified moving expenses of $12,000. If she is reimbursed by her employer, the
deduction is classified as a deduction for
AGI. If not reimbursed, the deduction is classified as an itemized
deduction.
a. True
b. False

7. Expenses incurred for
the production or collection of income generally
are deductions fromadjusted
gross income.
a. True
b. False

8. The Code does not
specifically define what constitutes a trade or business.
a. True
b. False

9. An expense need notbe recurring in order to be
“ordinary.”
a. True
b. False

10.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. True
b. False

.

11.The portion of a
shareholder­employee’s salary that is classified as unreasonable has no effect
on the amount of a shareholder­employee’s gross income, but results in an
increase in the taxable income of the corporation.
a. True
b. False

12.Generally, a
closely-held family corporation is notpermitted
to take a deduction for a salary paid to a family member in calculating
corporate taxable income.
a. True
b. False

13.Only under limited
circumstances can a loss on the sale of a personal use asset be deducted.
a. True
b. False

14.The income of a sole
proprietorship are reported on Schedule C (Profit or Loss from Business).
a. True
b. False

15.The cash method canbe used even if inventory and cost
of goods sold are an income producing factor in the business.
a. True
b. False
16.A taxpayer’s note or
promise to pay satisfies the “actually paid” requirement for the cash basis
method of accounting.
a. True
b. False

17.Isabella owns two
business entities. She may be able to use the cash method for one and the
accrual method for the other.
a. True
b. False

18.Under the “one­year
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.
a. True
b. False