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South Western Federal Taxation 2017 Comprehensive 40Th Edition Hoffman Test Bank Full Chapter PDF
South Western Federal Taxation 2017 Comprehensive 40Th Edition Hoffman Test Bank Full Chapter PDF
South Western Federal Taxation 2017 Comprehensive 40Th Edition Hoffman Test Bank Full Chapter PDF
1. Deductions are allowed unless a specific provision in the tax law provides otherwise.
a. True
b. False
ANSWER: False
RATIONALE: Deductions are a matter of legislative grace. The only deductions allowed are those
specifically provided for by statute, rulings, etc.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
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 from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
a. True
b. False
ANSWER: True
RATIONALE: The value of the tax benefit to Mitch for the deduction from AGI may be less than that for the
deduction for AGI. The value of the deduction for AGI for a taxpayer in the 28% bracket for a
$2,000 expenditure is $560 ($2,000 × 28%). If Mitch takes the standard deduction rather than
itemizing deductions, then the $2,000 expenditure that is classified as a deduction from AGI
has no tax benefit.
Copyright Cengage Learning. Powered by Cognero. Page 1
Chapter 06 - Deductions and Losses: In General
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analysis
OTHER: Time: 5 min.
3. Only some employment related expenses are classified as deductions for AGI.
a. True
b. False
ANSWER: True
RATIONALE: Unreimbursed employee expenses are classified as deductions from AGI while reimbursed
employee expenses are classified as deductions for AGI.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
4. Section 212 expenses that are related to rent and royalty income are deductions for AGI.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
5. 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
ANSWER: False
RATIONALE: Moving expenses are classified as deductions for AGI.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
Copyright Cengage Learning. Powered by Cognero. Page 2
Chapter 06 - Deductions and Losses: In General
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
6. Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.
a. True
b. False
ANSWER: True
RATIONALE: Two exceptions are those expenses incurred in producing rent and royalty income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
7. The Code does not specifically define what constitutes a trade or business.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
10. The portion of a shareholder-employee’s salary that is classified as unreasonable has no effect on the amount of a
shareholder-employee’s gross income, but results in an increase in the taxable income of the corporation.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
11. 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.
a. True
b. False
ANSWER: False
RATIONALE: Only unreasonable salaries are not deductible.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
13. The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business).
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
14. Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from
AGI.
a. True
b. False
ANSWER: False
RATIONALE: Such expenses are deductible for AGI.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-01 - LO: 6-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
15. The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.
a. True
b. False
ANSWER: False
RATIONALE: The accrual method must be used in these cases.
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
ANSWER: False
RATIONALE: Promising to pay or issuing a note does not satisfy the actually paid requirement.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-02 - LO: 6-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
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
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-02 - LO: 6-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
18. 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.
a. True
b. False
ANSWER: True
RATIONALE: If the one-year rule is not satisfied, the prepayment is prorated and deducted over the benefit
period.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-02 - LO: 6-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
Copyright Cengage Learning. Powered by Cognero. Page 6
Chapter 06 - Deductions and Losses: In General
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
19. None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is
deductible in the current period.
a. True
b. False
ANSWER: False
RATIONALE: The amount paid for the 18-month period is not all deductible in the current tax year because
the prepayment period extends substantially beyond the end of the tax year (i.e., must be
capitalized). However, that portion of the prepaid rent which relates to September through
December of the current tax year may be deducted in the current tax year.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-02 - LO: 6-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
20. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic
performance and all events tests.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-02 - LO: 6-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
21. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for
tax purposes, but is not allowed for a cash method taxpayer.
a. True
b. False
ANSWER: False
RATIONALE: A reserve for estimated expenses (e.g., bad debt) is not allowed to an accrual method
taxpayer for tax purposes because the economic performance test cannot be satisfied. For a
cash method taxpayer, there is no addition to the reserve for bad debts because income has
not been recognized that would have generated a debt.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-02 - LO: 6-02
22. All domestic bribes (i.e., to a U.S. official) are disallowed as deductions.
a. True
b. False
ANSWER: True
RATIONALE: However, a payment to a foreign official is deductible if it is not in violation of the Foreign
Corrupt Practices Act of 1977.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
23. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they
relate to a trade or business.
a. True
b. False
ANSWER: False
RATIONALE: Fines and penalties paid for violations of laws are never deductible.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
24. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 “grease” payment to a U.S.
government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi
Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan’s employer.
a. True
b. False
ANSWER: False
RATIONALE: The payment to the U.S. official is not deductible. However, unless the payment is illegal
under the Foreign Corrupt Practices Act of 1977, the payment to the Saudi official can be
deducted.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
25. The cost of legal advice associated with the preparation of an individual’s Federal income tax return is not deductible
because it is a personal expense.
a. True
b. False
ANSWER: False
RATIONALE: This deduction is expressly allowed under § 212.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
26. Two-thirds of treble damage payments under the antitrust law are not deductible.
a. True
b. False
ANSWER: True
RATIONALE: Only one-third of such payments is deductible.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
28. Legal expenses incurred in connection with rental property are deductions from AGI.
a. True
b. False
ANSWER: False
RATIONALE: This is a deduction for AGI.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
29. Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a
trade or business.
a. True
b. False
ANSWER: False
RATIONALE: In this circumstance, the legal fees are deductible.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
32. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S.
citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law,
the contribution by Cassie is deductible, while that by Jacques is not.
a. True
b. False
ANSWER: False
RATIONALE: Deductions are not permitted for political contributions.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
33. A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary
expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.
a. True
b. False
ANSWER: True
RATIONALE: The $1 million limit on deducting compensation applies only to executive compensation of
publicly traded companies.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
35. Investigation of a business unrelated to one’s present business never results in a current period deduction of the entire
amount if the amount of the investigation expenses exceeds $5,000.
a. True
b. False
ANSWER: True
RATIONALE: Even if the business is acquired, some or all of the expenses must be capitalized and
amortized over a minimum 180-month period. If the business is not acquired, no deduction
results.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
36. In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption
(i.e., profit in at least 3 out of 5 years) ensures treatment as a business.
a. True
b. False
ANSWER: False
RATIONALE: The satisfaction of the presumption merely shifts the burden of proof to the IRS. The
possibility still exists that the IRS can prove the activity is a hobby.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
Copyright Cengage Learning. Powered by Cognero. Page 12
Chapter 06 - Deductions and Losses: In General
OTHER: Time: 2 min.
37. If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from
the activity can be deducted in excess of the gross income from the activity.
a. True
b. False
ANSWER: False
RATIONALE: Satisfying the presumption shifts the burden of proof from the taxpayer to the IRS. Failing the
presumption merely means the burden of proof remains with the taxpayer.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 5 min.
38. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
39. A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.
a. True
b. False
ANSWER: True
RATIONALE: The 2%-of-AGI limitation can wipe out any deductible amount. Likewise, if the taxpayer does
not itemize, no deduction will be permitted.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
40. If an item such as property taxes and home mortgage interest exceed the income from a hobby, the excess amount of
this item over the hobby income can be deducted if the taxpayer itemizes deductions.
41. Hobby activity expenses are deductible from AGI to the extent of hobby income. Such expenses not in excess of
hobby income are not subject to the 2%-of-AGI floor.
a. True
b. False
ANSWER: False
RATIONALE: Such expenses are an itemized deduction and are subject to the 2%-of-AGI floor on
miscellaneous itemized deductions except for the property tax and mortgage interest.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
42. Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal
residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas
Martha is required to include the $3,000 in her gross income.
a. True
b. False
ANSWER: True
RATIONALE: The amount received as rent for a personal residence does not need to be included in the
taxpayer’s gross income unless the number of rental days exceeds 14. Thus, only Martha
need report her rental income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
44. If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.
a. True
b. False
ANSWER: False
RATIONALE: The personal use portion still must be prorated.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
45. If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related
expenses can be deducted.
a. True
b. False
ANSWER: False
RATIONALE: Only the expenses that normally are allowed as itemized deductions (e.g., mortgage interest
and property taxes) can be deducted.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 6-03 - LO: 6-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
46. The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
a. True
b. False
ANSWER: True
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