Question 1

Under the "one-year 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.

Accepted Answer

Under the one-year rule, prepaid expenses can be deducted in the current period if the asset will expire or be consumed by the end of the tax year following the year of payment. Therefore, the statement is true.

Question 2

The concept of reasonableness applies not only to salaries but also to other business expenses.

Accepted Answer

The concept of reasonableness applies to other business expenses as well, such as rent, utilities, and travel expenses. Just like with salaries, businesses are expected to incur reasonable expenses that are necessary for their operations and are not excessive or wasteful.

Question 3

Some expenses that are necessary are not ordinary and,therefore,are not deductible.

Accepted Answer

While some necessary expenses may be deductible, if they are not considered ordinary, necessary and reasonable in the course of conducting business, they may not be deductible. Examples could include extravagant business gifts or expensive outings with clients.

Question 4

Bonnie sells her personal use SUV for $22,000 (adjusted basis of $38,000).Her realized loss of $16,000 ($22,000 - $38,000)can be recognized for income tax purposes.

Accepted Answer

Losses on the sale of personal use property, such as a personal use SUV, are not deductible for income tax purposes.

Question 5

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance test.

Accepted Answer

The economic performance test determines when an expense can be deducted for accrual basis taxpayers. This test requires that the expense has been incurred, the service or property has been provided, and the taxpayer has not yet paid for the expense. Once these conditions are met, the expense is considered to have been economically performed and can be deducted on the tax return.

Question 6

A taxpayer in the 25% tax bracket may receive a different tax benefit for a $100 expenditure that is classified as a deduction from AGI than he or she will receive for a $100 expenditure that is classified as a deduction for AGI.

Accepted Answer

A deduction from AGI (above-the-line deduction) reduces the taxpayer's taxable income, which can result in a larger tax benefit for a taxpayer in a higher tax bracket. On the other hand, a deduction for AGI (itemized deduction) reduces the taxpayer's taxable income after it has been calculated, which can result in a smaller tax benefit for a taxpayer in a higher tax bracket.

Question 7

None of the prepaid rent paid on October 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.

Accepted Answer

The answer of None of the prepaid rent paid on...

Question 8

A taxpayer who claims the standard deduction can also deduct expenses that are classified as deductions for AGI.

Accepted Answer

This is true. Deductions for AGI, such as certain medical expenses, IRA contributions, alimony payments, and student loan interest, are not itemized deductions and can be claimed by taxpayers who are taking the standard deduction.

Question 9

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.

Accepted Answer

A closely-held family corporation can take a deduction for a salary paid to a family member if that salary is reasonable and for services actually rendered. However, if the salary is deemed to be excessive or not commensurate with the services provided, the deduction may be disallowed by the IRS.

Question 10

A moving expense that is reimbursed by the employer is a deduction for AGI,whereas an unreimbursed moving expense is classified as an itemized deduction.

Accepted Answer

Reimbursed moving expenses are not deductible, and unreimbursed moving expenses are not itemized deductions under the current tax law, as the deduction for moving expenses was suspended from 2018 to 2025 for most taxpayers.

Question 11

Only certain employment related expenses are classified as deductions for AGI.

Accepted Answer

Only certain employment related expenses such as business-related travel expenses, costs of certain work-related supplies and equipment, and expenses related to job hunting and relocation are classified as deductions for AGI.

Question 12

For an expense to be deducted as ordinary,it must be recurring in nature.

Accepted Answer

Recurring nature is not a requirement for an expense to be deducted as ordinary. An expense can be considered ordinary if it is common and accepted in the taxpayer's trade or business.

Question 13

Rob,a shareholder-employee of Falcon,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 Rob's gross income by $100,000 and increase Falcon's gross income by $100,000.

Accepted Answer

The reclassification of $100,000 as unreasonable compensation would not decrease Rob's gross income but rather reclassify it as a dividend. This means Rob's gross income remains the same, but the nature of the income changes. Falcon's gross income would not increase; instead, its taxable income might increase due to the disallowed deduction for the unreasonable compensation.

Question 14

Investment-related expenses such as those related to investments in stocks and bonds are deductions for AGI.

Accepted Answer

Investment-related expenses are generally considered itemized deductions, not deductions for Adjusted Gross Income (AGI).

Question 15

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

Accepted Answer

This is true. Sole proprietorships are considered pass-through entities, which means that the income and expenses of the business are reported on the owner's personal tax return using Schedule C.

Question 16

Expenses incurred in a trade or business are deductible from AGI.

Accepted Answer

Expenses incurred in a trade or business are generally deductible from gross income to arrive at adjusted gross income (AGI), not deducted from AGI.

Question 17

Payment of expenses by a cash basis taxpayer does not necessarily ensure a deduction in the current year.

Accepted Answer

This is because cash basis taxpayers can only deduct expenses in the year in which they are actually paid, rather than when they are incurred. If the payment is made in the current year, then it can be deducted in the current year, but if it is made in the following year, it cannot be deducted until that year. Therefore, the timing of the payment is crucial for determining whether or not it can be deducted in the current year.

Question 18

Using his bank credit card,Seneca,a cash method taxpayer,charged a business expense on December 5,2010.He paid the credit card bill,which included the charge,on January 23,2011.Seneca can deduct the expense in 2010.

Accepted Answer

According to the cash basis method of accounting, expenses are deductible in the year they are paid. In this case, Seneca paid the credit card bill (including the business expense) in January 2011, so he can deduct it on his 2011 tax return. However, there is an exception for credit card charges where the expenses were incurred in one tax year but paid in the following year. The IRS considers these expenses to be paid in the year they were charged, which means Seneca can deduct the expense on his 2010 tax return.

Question 19

For an expense to be deducted,the amount must be paid by the taxpayer.

Accepted Answer

An expense can be deducted if it is incurred, even if it has not yet been paid, as long as it meets the criteria set by tax laws.

Question 20

All expenses associated with the production of income are classified as deductions from AGI.

Accepted Answer

Not all expenses associated with the production of income are classified as deductions from AGI. Some expenses, such as personal expenses, are not deductible while others may be classified as itemized deductions or above-the-line deductions.

Quiz 6: Deductions and Losses: in General