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CHAPTER 7—OVERVIEW OF DEDUCTIONS AND LOSSES TRUE/FALSE 1. In regard to the statutory scheme for determining deductibility, a taxpayer may deduct an expense only if it is "specifically" identified (e.g., interest) as deductible in the Code. For example, advertising ex- pense of a business would not be deductible unless a code provision specifically indicated that advert- ising expense is deductible. ANS: F The expense is deductible if it meets the general criteria in §§ 162 and 212 and is not disallowed by some other section of the Code. PTS: 1 REF: p. 7-3 2. For tax purposes, the term "nonbusiness expense" refers to nondeductible personal expenses, such as the costs of personal hygiene. ANS: F The term refers to expenses deductible under § 212 relating to production-of-income expenses and not business expenses. PTS: 1 REF: p. 7-6 3. J, employed as a male dancer, regularly uses a tanning salon to keep his body looking healthy. J may deduct the cost of visiting the tanning salon. ANS: F Before an expense is deductible under § 162, it must be directly connected with or must pertain to the taxpayer's trade or business. PTS: 1 REF: pp. 7-6 and 7-7 4. An "ordinary" business expense need not be recurring. ANS: T The expense only needs to be one that is customarily incurred under the given set of circumstances. PTS: 1 REF: p. 7-7 5. A cash basis taxpayer may deduct all prepaid interest in the year it is paid. ANS: F Except for "points," interest may only be deducted over the period it accrues. PTS: 1 REF: p. 7-13 6. V bought electric motors for her business from a sales representative who said that they had a four horsepower output. V discovered while using the motors that they only produce two horsepower after a few weeks use. V may recognize as a loss the value of the reduction in horsepower and currently de- duct the amount as a business expense.
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ANS: F V's business loss for property cannot be deducted until there has been a sale of the property, or the property, becomes completely useless. PTS: 1 REF: p. 7-19 7. Any expense that is reimbursed by the taxpayer's employer is deductible for A.G.I, (e.g., reimburse- ment of a parking ticket incurred by a salesperson when calling on a customer). ANS: F If an expense is reimbursed by the employer, the expense will be classified as a deduction for A.G. I., but only if it is otherwise deductible under some section of the Code. PTS: 1 REF: pp. 7-20 and 7-21 8. T's itemized deductions for the current year are $14,000. Assuming the standard deduction is $5,000, T may deduct no more than $9,000 of her itemized deductions. ANS: F In computing taxable income, T may deduct the higher of her itemized deductions or her standard de- duction. Her itemized deductions are not reduced by the standard deduction as was the case under prior law. PTS:
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