Exam 9: Business Income, Deductions, and Accounting Methods

The deduction for business interest expense is limited to the sum of (1)business interest income and (2)30 percent of the adjusted taxable income of the taxpayer for the taxable year.

Clyde operates a sole proprietorship using the cash method. This year, Clyde made the following expenditures: $480 to U.S. Bank for 12 months of interest accruing on a business loan from September 1 of this year through August 31 of next year even though only $160 of interest accrued this year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this year?

Which of the following is a true statement?

The all-events test for income determines the period in which income will be recognized for tax purposes.

Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

Which of the following is a true statement?

Which of the following is likely to be a business expense fully deductible in the current year?

David purchased a deli shop on February 1^st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31^st of this year as follows: What income should David report from his sole proprietorship?

Which of the following is a payment liability?

Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $360 for the meal and separately paid $222 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

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

Joe operates a plumbing business that uses the accrual method and reports on a calendar year. This year, Joe signed a $50,000 binding contract with Brian. Under the contract, Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour. This year, Brian provided 200 hours of repair services and billed Joe for $5,000. At year-end, Joe had not paid Brian for the services. What amount, if any, can Joe deduct for the repair services this year?

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

Which of the following is a true statement about the limitation on business interest deductions?

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.

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

Smith operates a roof repair business. This year, Smith's business generated cash receipts of $32,660, 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.

Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures? $1,000 dinnerand theater with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting

George operates a business thatin 2020 generated revenues of $50 million and allocable taxable income of $560,000. Included in the computation of allocable taxable income were $900,000 of business interest expense, $20,000 of business interest income, and $180,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?