AF 450 – Summer 2024
HW #3 for Chapter 5 and 8 (Part II)
CHAPTER 5
Q1 (Classification of Deductions). Problem #32
The Internal Revenue Service (IRS) considered renting out single modified rental properties as
economic activity. Legal expenses will be considered deductible business expenditures if the IRS
maintains its approach. However, according to the IRS, a rental property must generate active
revenue to qualify as a trade or company. The extent to which the lessor engages in management
is a significant factor to consider when deciding whether or not rents constitute revenue from an
operating company. If the IRS maintains this stance, Sam's legal fees will be considered
production-related costs connected to revenue creation because he is not participating in the
management of the rental business. Costs directly related to the production of rental revenue
might be deducted from the total gross income after adjustments have been made.
Q2 (Mixed Business and Personal Expenditures). Problem #35
a) Operating Expense = 3800 x 70% = 2800 = 2660. It is possible for her to exclude as a
business expenditure up to $2,660 of the costs associated with running the car.
$1,140 probably accounts for 30% of the costs associated with running the automobile (38
00 x 30).
1
, Since it is a personal expenditure, the $1140 portion of the car's running expenses can
not be deducted as a business expense like the rest of the charges.
b)
Particulars Total Business Personal
Selling price 6500 4550 1950
Deduct: Operating expense 14500 9800 4200
Add: Depreciation for adjustment 5880
Gain on sale 630 2250
The gain that is subject to taxation for the business component of Ms. Lucy's sale of the
automobile is $630. The loss on sale of the personal portion of the automobile, which came to
$2,250, is not deductible as a loss from personal consumption.
Q3 (Start-up Costs). Problem #41
Deductions in the current year:
25000 – 5000(computer store) = 20000
20000/ 180 = 111
5000 x (111 x6) = $5667
Since Neal and Ned are looking into the possibility of expanding an existing company, they may
be able to recoup the $25,000 cost as a current expenditure. It is standard practice to classify the
cost of the inquiry as a required and regular company expenditure.
2
HW #3 for Chapter 5 and 8 (Part II)
CHAPTER 5
Q1 (Classification of Deductions). Problem #32
The Internal Revenue Service (IRS) considered renting out single modified rental properties as
economic activity. Legal expenses will be considered deductible business expenditures if the IRS
maintains its approach. However, according to the IRS, a rental property must generate active
revenue to qualify as a trade or company. The extent to which the lessor engages in management
is a significant factor to consider when deciding whether or not rents constitute revenue from an
operating company. If the IRS maintains this stance, Sam's legal fees will be considered
production-related costs connected to revenue creation because he is not participating in the
management of the rental business. Costs directly related to the production of rental revenue
might be deducted from the total gross income after adjustments have been made.
Q2 (Mixed Business and Personal Expenditures). Problem #35
a) Operating Expense = 3800 x 70% = 2800 = 2660. It is possible for her to exclude as a
business expenditure up to $2,660 of the costs associated with running the car.
$1,140 probably accounts for 30% of the costs associated with running the automobile (38
00 x 30).
1
, Since it is a personal expenditure, the $1140 portion of the car's running expenses can
not be deducted as a business expense like the rest of the charges.
b)
Particulars Total Business Personal
Selling price 6500 4550 1950
Deduct: Operating expense 14500 9800 4200
Add: Depreciation for adjustment 5880
Gain on sale 630 2250
The gain that is subject to taxation for the business component of Ms. Lucy's sale of the
automobile is $630. The loss on sale of the personal portion of the automobile, which came to
$2,250, is not deductible as a loss from personal consumption.
Q3 (Start-up Costs). Problem #41
Deductions in the current year:
25000 – 5000(computer store) = 20000
20000/ 180 = 111
5000 x (111 x6) = $5667
Since Neal and Ned are looking into the possibility of expanding an existing company, they may
be able to recoup the $25,000 cost as a current expenditure. It is standard practice to classify the
cost of the inquiry as a required and regular company expenditure.
2
