Question 1

Only half the cost of a business meal is deductible even if the meal is extravagant.

Accepted Answer

A) True 
 B)False  False

Question 2

Smith operates a roof repair business.This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business:
 $\begin{array}{llcc}
  \text {  Advertising} & \$500 \
 \text {Car ard truck expenses  } &1,360\
 \text { Depreciatior } &3,200\
 \text {Employee compensation  } &5,000\
 \text { Education } &1,000\
\end{array}$
 The education expense was for a two-week, nighttime course in business management.Smith believes the expenditure should qualify as an ordinary and necessary business expense.What net income should Smith report from his business? Smith is on the cash method and calendar year.

Accepted Answer

$20,940 = $32,000 − $11,060.
All of the expenses are typical ordinary and necessary expenditures.

Question 3

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year.On September 1st of this year Anne paid $2,280 of interest on a loan.The interest accrues evenly over 19 months ($120 per month)from June 1st of this year through December 31st of next year.In addition, on September 1st Anne also paid $2,700 for 18 months of professional liability insurance ($150 per month).What amount of interest and insurance can Anne deduct this year?

Accepted Answer

$1,440 = $840 interest ($120 × 7 months-June through December of this year)plus $600 insurance ($2,700/18 × 4 months-September through December of this year).
Interest accrues ratably for an accrual-method taxpayer.Insurance is a payment liability and payment satisfies economic performance.However, since the insurance covers more than 12 months the 12-month rule does not apply and the prepayment must be prorated over the period that the expenditure benefits.

Question 4

Judy is a self-employed musician who performs for a variety of events.This year Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance.As a consequence, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor.Judy normally hires three part-time employees to help her schedule events and transport equipment.Judy paid a total of $33,000 to her employees through June of this year.In June Judy fired her part-time employees and hired her husband to replace them.However, Judy paid him $55,000 rather than $33,000.Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

Accepted Answer

$66,000.
The fine and political contribu

Question 5

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey.After Shelley attended the conference, she had dinner with an old friend who lived nearby.Shelly documented her expenditures (described below).What amount can Shelley deduct? $\begin{array}{llcc}
  \text {Airfare to New Jersey  } & \$2,000\
 \text {Meals at the conference  } &220\
 \text { Meal with ar old friend } &120\
 \text {Lodgirg ir New Jersey  } &450\
 \text { Reratal car } &180\

\end{array}$

Accepted Answer

A) $2,850. 
B) $2,740. 
C) $1,850 if Shelley itemizes the deductions. 
D) All of these expenses are deductible but only if Shelley attends a conference in Texas. 
E) None of the expenses are deductible because Shelly visited her friend. 
A) $2,850. 
B) $2,740. 
C) $1,850 if Shelley itemizes the deductions. 
D) All of these expenses are deductible but only if Shelley attends a conference in Texas. 
E) None of the expenses are deductible because Shelly visited her friend.

Question 6

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

Accepted Answer

A) True 
 B)False

Question 7

Marilyn operates a day care center as a cash-method sole proprietorship.On August 1st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months.How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

Accepted Answer

$4,000.
Prepayments

Question 8

A short tax year can end on any day of any month other than December.

Accepted Answer

A) True 
 B)False

Question 9

Otto operates a bakery and is on the cash method and calendar year.This year one of Otto's ovens caught fire and was partially destroyed.Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire.Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage.What is Otto's casualty loss deduction?

Accepted Answer

($2,900)= $1,500 − $4,400.
If a business

Question 10

The full-inclusion method requires cash-basis taxpayers to include prepayments for goods or services into realized income.

Accepted Answer

A) True 
 B)False

Question 11

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Accepted Answer

A) Whether an expenditure is related to a business activity. 
B) Whether an expenditure will be likely to produce income. 
C) Timeliness of an expenditure. 
D) Reasonableness of an expenditure. 
E) All of the choices are correct. 
A) Whether an expenditure is related to a business activity. 
B) Whether an expenditure will be likely to produce income. 
C) Timeliness of an expenditure. 
D) Reasonableness of an expenditure. 
E) All of the choices are correct.

Question 12

Ajax Computer Company is an accrual-method calendar-year taxpayer.Ajax has never advertised in the national media prior to this year.In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year.In addition, in November of this year the company paid $500,000 for a one-time advertising blitz during a professional golf tournament in April of next year.What amount of these payments, if any, can Ajax deduct this year?

Accepted Answer

A) $1 million 
B) $500,000 
C) $1.5 million 
D) $1.5 million only if the professional golf tournament is played before April 15 
E) No deduction can be claimed this year 
A) $1 million 
B) $500,000 
C) $1.5 million 
D) $1.5 million only if the professional golf tournament is played before April 15 
E) No deduction can be claimed this year

Question 13

Which of the following is a true statement?

Accepted Answer

A) Interest expense is not deductible if the loan is used to purchase municipal bonds. 
B) Insurance premiums are not deductible if paid for "key-employee" life insurance. 
C) One-half of the cost of business meals is not deductible. 
D) All of these choices are true. 
E) None of the choices are true. 
A) Interest expense is not deductible if the loan is used to purchase municipal bonds. 
B) Insurance premiums are not deductible if paid for "key-employee" life insurance. 
C) One-half of the cost of business meals is not deductible. 
D) All of these choices are true. 
E) None of the choices are true.

Question 14

Werner is the president and CEO of Acme, Inc., and this year he took a prospective client to dinner.During the dinner Werner and the client discussed a proposed contract for over $6 million as well as personal matters.After dinner Werner took the client to a football game and no business was discussed.Werner paid $1,220 for an expensive (but not extravagant)dinner and spent $600 for tickets to the game.What is the deductible amount of these expenses?

Accepted Answer

$610 = 50% × ($1,220

Question 15

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year.Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Accepted Answer

A) Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year. 
B) Jim must defer the recognition of the income until the income is earned. 
C) Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided. 
D) Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes. 
E) Jim can never defer the recognition of the prepayments of income. 
A) Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year. 
B) Jim must defer the recognition of the income until the income is earned. 
C) Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided. 
D) Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes. 
E) Jim can never defer the recognition of the prepayments of income.

Question 16

A business can deduct the cost of uniforms supplied to employees.

Accepted Answer

A) True 
 B)False

Question 17

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes.This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes.At year-end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers.What amount of the rebates, if any, can Big Homes deduct this year?

Accepted Answer

A) $12,000 because rebates are payment liabilities. 
B) $19,500 because Big Homes is an accrual-method taxpayer. 
C) $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year. 
D) $12,000 because the $7,500 liability is not fixed and determinable. 
E) Big Homes is not entitled to a deduction because rebates are against public policy. 
A) $12,000 because rebates are payment liabilities. 
B) $19,500 because Big Homes is an accrual-method taxpayer. 
C) $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year. 
D) $12,000 because the $7,500 liability is not fixed and determinable. 
E) Big Homes is not entitled to a deduction because rebates are against public policy.

Question 18

Colby Motors uses the accrual method and reports on a calendar year.In December of last year, Colby acquired auto repair equipment.As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years.Colby paid the cost of the warranty, $15,000, in January of this year.What can Colby deduct for the cost of the warranty on the tax return for last year?

Accepted Answer

Zero.The warranty cost is only deductibl

Question 19

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss that is not properly allocable to a trade or business.

Accepted Answer

A) True 
 B)False

Question 20

Joe is a self-employed electrician who operates his business on the accrual method.This year Joe purchased a shop for his business, and for the first time at year-end he received a bill for $4,500 of property taxes on his shop.Joe didn't pay the taxes until after year-end but prior to filing his tax return.Which of the following is a true statement?

Accepted Answer

A) If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year. 
B) The taxes are a payment liability. 
C) The taxes would not be deductible if Joe's business was on the cash method. 
D) Unless Joe makes an election, the taxes are not deductible this year. 
E) All of the choices are true. 
A) If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year. 
B) The taxes are a payment liability. 
C) The taxes would not be deductible if Joe's business was on the cash method. 
D) Unless Joe makes an election, the taxes are not deductible this year. 
E) All of the choices are true.

Only half the cost of a business meal is deductible even if the meal is extravagant.

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

A short tax year can end on any day of any month other than December.

The full-inclusion method requires cash-basis taxpayers to include prepayments for goods or services into realized income.

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Which of the following is a true statement?

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year.Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

A business can deduct the cost of uniforms supplied to employees.

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss that is not properly allocable to a trade or business.

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview, Dependents, and Filing Status

Gross Income and Exclusions

Individual for Agi Deductions

Individual From Agi Deductions

Individual Income Tax Computation and Tax Credits

Property Acquisition and Cost Recovery

Property Dispositions

Entities Overview

Corporate Formations and Operations

Corporate Nonliquidating and Liquidating Distributions

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

Filters

Exam 9: Business Income, Deductions, and Accounting Methods

Only half the cost of a business meal is deductible even if the meal is extravagant.

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

A short tax year can end on any day of any month other than December.

The full-inclusion method requires cash-basis taxpayers to include prepayments for goods or services into realized income.

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Which of the following is a true statement?

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year.Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

A business can deduct the cost of uniforms supplied to employees.

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss that is not properly allocable to a trade or business.

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview, Dependents, and Filing Status

Gross Income and Exclusions

Individual for Agi Deductions

Individual From Agi Deductions

Individual Income Tax Computation and Tax Credits

Property Acquisition and Cost Recovery

Property Dispositions

Entities Overview

Corporate Formations and Operations

Corporate Nonliquidating and Liquidating Distributions

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

Filters