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Exam 5: Business Deductions

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Question 81

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An expense need not be recurring in order to be "ordinary."

A) True
B) False

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Question 82

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MACRS depreciation is used to compute earnings and profits.

A) True
B) False

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Question 83

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Red Company is a proprietorship owned by Sally, a single individual.Red manufactures and sells widgets.An examination of Red's records shows the following items for the current year: $\begin{array}{l}\text { Domestic production gross receipts } & \$ 2,500,000 \\\text { Cost of goods sold for domestic products } & 600,000 \\\text { Expenses directly related to domestic production gross } & \\\text { receipts (other than wages) } &280,000 \\ \text { Ratable portion of other expenses } & 100,000 \\\text { Other expenses not allocated to domestic production gross receipts } &30,000 \\\text { W-2 wages paid to employees engaged in qualified domestic } \\\text { production activities } & 270,000\\ \text { Total W-2 wages }& 320,000\\\\\text { Sally also had the following additional items: }\\\text { Dividends received } & \$ 20,000 \\\text { Interest income } & 10,000\end{array}$ ? Determine Sally's domestic production activities deduction for the current year.

Doug purchased a new factory building on January 15, 1990, for $400,000.On March 1, 2017, the building was sold.Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method.

The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.

Janet is the CEO for Silver, Inc., a closely held corporation.Her total compensation for 2017 is $5 million.Of this amount, $2 million is a salary and $3 million is a bonus.The bonus was calculated as 5% of Silver's net income before the bonus and before taxes ($60 million × 5% = $3 million).The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver's performance.It is approved annually by the entire board of directors (1 of the 5 directors is an outside director) of Silver.How much of Janet's compensation can Silver deduct for 2017?

George purchases used seven-year class property at a cost of $200,000 on April 20, 2017.Determine George's cost recovery deduction for 2017 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation.

On December 20, 2017, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity.The payment, which is made on April 11, 2018, may be claimed as a deduction for tax year 2017.

Sid bought a new $1,310,000 seven-year class asset on August 2, 2017.On December 2, 2017, he purchased $800,000 of used five-year class assets.If Sid elects § 179 and takes additional first-year depreciation, what is the maximum cost recovery deduction for these purchases for 2017?

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states.During 2017, 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:

Barry purchased a used business asset (seven-year property) on September 30, 2017, at a cost of $200,000.This is the only asset he purchased during the year.Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation, and did not elect straight-line cost recovery.Barry sold the asset on July 17, 2018.Determine the cost recovery deduction for 2018.

Petal, Inc.is an accrual basis taxpayer.Petal uses the aging approach to calculate the reserve for bad debts.During 2017, the following occur associated with bad debts. $\begin{array}{lr}\text { Credit sales } & \$ 400,000 \\\text { Collections on credit sales } & 250,000 \\\text { Amount added to the reserve } & 10,000 \\\text { Beginning balance in the reserve } & -0- \\\text { Identifiable bad debts during } 2017 & 12,000\end{array}$ The amount of the deduction for bad debt expense for Petal for 2017 is:

Nora purchased a new automobile on July 20, 2016, for $29,000.The car was used 60% for business and 40% for personal use.In 2017, the car was used 30% for business and 70% for personal use.Nora elects not to take additional first-year depreciation.Determine the cost recovery recapture and the cost recovery deduction for 2017.

Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.

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 gain of Marge).

The luxury auto cost recovery limits applies to all automobiles.

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

The only asset Bill purchased during 2017 was a new seven-year class asset.The asset, which was listed property, was acquired on June 17 at a cost of $50,000.The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use.Bill always elects to expense the maximum amount under § 179 whenever it is applicable.The net income from the business before the § 179 deduction is $100,000.Determine Bill's maximum deduction with respect to the property for 2017.

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction because of the taxable income limitation, the product of the amount not allowed multiplied by the DPAD percentage rate (currently 9%) can be carried over for 5 years.