Exam 1: Business Income, Deductions, and Accounting Methods

Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

Which of the following is a payment liability?

Which of the following expenditures is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

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: 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.

Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident. The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost. What is the amount of Don's casualty loss deduction?

Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights' lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

Which of the following expenditures is most likely to be deductible for a construction business?

John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which of the following expenditures is not deductible in any amount? 1. Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary. She carefully documented the business use of the auto (11,700 miles this year) and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.

Alvin is a self-employed sound technician who reports on the cash method and calendar year. Alvin has a shop in Austin, Texas, but he spends much of his time away from his shop traveling to and from various concerts around the country. Alvin leases a truck to move his equipment around the country and this year he spent $12,000 in lease payments and paid $18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips. What amount of these expenses may Alvin deduct as business expenses?

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1^st of this year Anne paid $2,280 of interest on a loan. The interest accrues evenly over 19 months ($120 per month) from June 1^st of this year through December 31^st of next year. In addition, on September 1^st 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?

Ralph borrowed $4 million and used the proceeds in his Internet business. The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $26 million or less for the prior three taxable years.

Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

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

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.

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.