Exam 6: Business Expenses

An accrual-basis taxpayer deducts an expense when the cash is paid even if the service for which the money is paid has not been rendered.

Clark Corporation has income per books before tax of $1,500,000. In computing income per books, Clark included $7,000 interest income from tax-exempt municipal bonds and deducted $10,000 for business meal expenses, $50,000 for depreciation expense using the straight-line method and $15,000 accrued for bad debt expense using the allowance method. It actually wrote off only $9,000 in bad debts this year and its tax depreciation expense was $80,000. What is Clark Corporation's taxable income?

A taxpayer cannot take a deduction for a disputed amount until the amount in dispute is settled.

Other Objective Questions Designate whether the following expenses are fully deductible (F), partially deductible (P), or nondeductible (N) in the year paid. -Transportation expenses on a business trip within the United States if business days exceed personal days.

What limitations are placed on the deductibility of expenses incurred in the rental of residential property?

Which of the following business expenses is not deductible?

Shelley has a small photographic studio in her home where she takes portraits of a variety of pets for her clients and develops and prints the photos. Last year she earned only $5,500 and had expenses for supplies and film of $2,500. The studio takes up 300 square feet of her 1,500 square foot home. Total relevant home expenses are: Taxes = $2,100; Interest = $9,000; Utilities = $1,500; Repairs and maintenance = $600. Depreciation for the studio portion of the home = $1,000. How much of each expense can Shelley deduct for her photo studio?

Under no circumstances are business deductions allowed for expenses that are not substantiated by a paper trail.

Other Objective Questions Designate whether the following expenses are fully deductible (F), partially deductible (P), or nondeductible (N) in the year paid. -Mortgage interest and taxes on the home in which a sole proprietor has a home office. Gross profit from the business is only $1,500.

George took a customer to dinner where they discussed business and then went to see a play. He spent $120 for the meal and left a $25 tip. Cab fare to the theater was $10 and George paid a scalper $200 for the two play tickets with a face value of $80 each. What is George's allowable deduction for these expenses if the expenses were incurred in 2017? How would your answer change if these expenses were incurred in 2018?

Other Objective Questions Designate whether the following expenses are fully deductible (F), partially deductible (P), or nondeductible (N) in the year paid. -Matthew, a car dealer in Atlanta, wants to open a restaurant in Miami. He spends $8,000 investigating the location and feasibility of opening the restaurant in 2018, Matthew opens the restaurant in Miami in November and spends an additional $7,000 in start-up costs. In 2018 Matthew can:

Cailey incurs $3,600 for business meals while traveling for her employer, Lewis Corporation. Cailey is reimbursed in full by Lewis under an accountable plan. What amounts can Cailey and Lewis deduct?

In April 2018, Tobias, a sole proprietor, worked for a new client in the next county for the day. He drove 75 miles each way for the job, paid $4 in tolls, $7 for parking and $9 for lunch. What is his allowable business expense deduction?

Nicholas wanted to take an important customer to a hockey game in 2017. Although the face value of a ticket was only $50, the only way he could get tickets was by paying a scalper $160 for each ticket. Assuming all other deductibility requirements are met, how much could Nicholas deduct for each ticket in 2017?

Briefly describe the process that a corporation must complete in order to recognize a tax benefit from an uncertain tax position that reduces a business's current or future income tax liability,

What are the restrictions placed on a cash-basis taxpayer in deducting prepaid expenses?

Other Objective Questions Designate whether the following expenses are fully deductible (F), partially deductible (P), or nondeductible (N) in the year paid. -Fines by the health department for unsanitary conditions.

Robinson Corporation has income per books before tax of $2,000,000. In computing income per books, Robinson included $8,000 interest income from tax-exempt municipal bonds and $500,000 life insurance proceeds it received as the beneficiary on a policy for the corporate vice president who was killed in a plane crash while on company business, and it deducted $50,000 for business meal expenses, $4,000 for premiums on officers' life insurance policies (the corporation is the beneficiary for these policies), $40,000 for a series of advertisements on current products, and $500 for fines. What is Robinson Corporation's taxable income?

Carey operates Crib as a sole proprietorship, a cash-basis company, that has $50,000 of expenses it could pay this year or it could postpone payment until next year. What is the effect of postponing the payment, using a 6 percent discount rate, if Carey's current marginal tax rate is 22 percent but is expected to be 32 percent next year? How would your answer change if the next year's tax rate is expected to be 10 percent? (The present value of $1 at 6% is .943. Do not consider self-employment tax.

Lopez Corporation has income per books before tax of $323,000. In computing income per books, Lopez deducted $20,000 for meals and entertainment expenses, $3,000 for premiums on officers' life insurance policies (the corporation is the beneficiary for these policies), and $100 for fines. What is Lopez Corporation's taxable income?