1. LO.1 “All income must be reported, and all deductions are allowed unless specifi-cally disallowed in the Code.” Discuss.
  2. LO.1 Michael earned $20,000 at the K-M Resort Golf Club during the summer prior to his senior year in college. He wants to make a contribution to a traditional IRA, but the amount is dependent on whether it reduces his taxable income. If Michael is going to claim the standard deduction, will a contribution to a traditional IRA reduce his taxable income? Explain.
  3. LO.1 Classify each of the following expenditures paid in 2019 as a deduction for AGI, a deduction from AGI, or not deductible:
    • Roberto gives cash to his father as a birthday gift.
    • Sandra gives cash to her church.
    • Albert pays Dr. Dafashy for medical services rendered.
    • Mia pays alimony to Bill.
    • Rex, who is self-employed, contributes to his pension plan.
    • Bonita pays expenses associated with her rental property.
    • Lu, who operates a sole proprietorship, takes a client to dinner to discuss new business.
  4. LO.1 Classify each of the following expenditures paid in 2019 as a deduction for AGI, a deduction from AGI, or not deductible:
    • Barak contributes to his H.R. 10 plan (i.e., a retirement plan for a self-employed individual).
    • Keith pays child support to his former wife, Renee, for the support of their son, Chris.
    • Judy pays professional dues that are not reimbursed by her employer.
    • Ted pays $500 as the monthly mortgage payment on his personal residence. Of this amount, $100 represents a payment on principal and $400 represents an interest payment.
    • Oni pays a moving company for moving her household goods to Detroit, where she is starting a new job. She is not reimbursed by her employer.
    • Ralph pays $6,000 of property taxes on his personal residence and $5,000 of state income taxes.
  5. LO.1 In 2019, Larry and Susan each invest $10,000 in separate investment activities. They each incur deductible expenses of $800 associated with their respective investments. Explain why Larry’s expenses might not be deductible and Susan’s expenses might be appropriately classified as deductions for AGI.
  6. LO.1 Nanette, a single taxpayer, is a first-grade teacher. Potential deductions are charitable contributions of $800, personal property taxes on her car of $240, and various supplies purchased for use in her classroom of $225 (none reimbursed by her school). How will these items affect Nanette’s Federal income tax return for 2019?
  7. LO.1 In the determination of whether a business expense is deductible, the rea-sonableness requirement applies only to salaries. Evaluate this statement.
  8. LO.1 Dave uses the second floor of a building for his residence and the first floor for his business. The uninsured building is destroyed by fire. Are the tax con-sequences the same for each part of the building? Explain.
  9. LO.1 Monique owns a building that she leases to an individual who operates a grocery store. Rent income is $10,000, and rental expenses are $6,000. On what Form 1040 schedule or schedules are the income and expenses reported?
  10. LO.2 What is the “actually paid” requirement for the deduction of an expense by a cash basis taxpayer? Does actual payment ensure a deduction? Explain.
  11. LO.2 Falcon, Inc., paid salaries of $500,000 to its employees during its first year of operations. At the end of the year, Falcon had unpaid salaries of $45,000.
    • Calculate the salary deduction if Falcon is a cash basis taxpayer.
    • Calculate the salary deduction if Falcon is an accrual basis taxpayer.
  12. LO.2 Maud, a calendar year taxpayer, is the owner of a sole proprietorship that uses the cash method. On February 1, 2019, she leases an office building to usein her business for $120,000 for an 18-month period. To obtain this favorable lease rate, she pays the $120,000 at the inception of the lease. How much rent expense may Maud deduct on her 2019 tax return?
  13. LO.3 Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year:Rent $ 24,000Bribes 40,000Travel expenses 4,000Utilities 18,000Wages 230,000Payroll taxes 13,800Property insurance 1,600Illegal kickbacks 22,000What are Vella’s total deductible expenses for tax purposes?
  14. LO.3 Printer Company pays a $25,000 annual membership fee to a trade association for paper wholesalers. The trade association estimates that 60% of its dues are allocated to lobbying activities.
    • What are Printer’s total deductible expenses for tax purposes?
    • Assume the same facts as above, except that the $25,000 was incurred for in-house lobbying expenses. What are Printer’s total deductible expenses for tax purposes?
  15. LO.3 Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the bakery on November 1, 2019.Stanford incurred the following expenses:Total investigation costs related to the restaurant $28,000Total investigation costs related to the bakery 51,000What is the maximum amount Stanford can deduct in 2019 for investigation expenses?

LO.1 Explain how an account receivable can give rise to a bad debt deduction.

  1. LO.1 Ron, a cash basis taxpayer, sells his business accounts receivable of $100,000 to Felicia for $70,000 (70% of the actual accounts receivable). Discuss the amount and classification of Ron’s bad debt deduction.
  2. LO.1 Discuss when a bad debt deduction can be taken for a nonbusiness debt.
  3. LO.1 Discuss the treatment of a business bad debt when the business also has long-term capital gains.
  4. LO.1, 2, 3, 4, 5 Many years ago, Jack purchased 400 shares of Canary stock. During the current year, the stock became worthless. It was determined that the company “went under” because several corporate officers embezzled a large amount of company funds. Identify the relevant tax issues for Jack.
  5. LO.2 Sean is in the business of buying and selling stocks and bonds. He has a bond of Green Corporation for which he paid $200,000. The bond is currently worth only $50,000. Discuss whether Sean can take a $150,000 loss for a business bad debt or for a worthless security.
  6. LO.2 Discuss the tax treatment of the sale of § 1244 stock at a gain.
  7. LO.3, 4 Jim discovers that his residence has extensive termite damage. Discuss whether he may take a deduction for the damage to his residence.
  8. LO.3, 4 The value of Terrah’s personal residence has declined significantly because of a recent forest fire in the area where she lives. The fire was a Federally declared disaster. Terrah’s house suffered no actual damage during the fire, but because much of the surrounding area was destroyed, the value of all of the homes in the area declined substantially. Discuss whether Terrah can take a casualty loss for the decline in value of her residence caused by the fire.
  9. LO.4 Discuss at what point in time a theft loss generally is recognized.

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