Exam 9: Business Income, Deductions, and Accounting Methods

The deduction for business interest expense is limited in 2020 to the sum of (1)business interest income and (2)40 percent of the adjusted taxable income of the taxpayer for the taxable year.

Bill operates a proprietorship using the cash method of accounting, and this year he received the following:$140 in cash from a customer for services rendered this yeara promise from a customer to pay $192 for services rendered this yeartickets to a football game worth $230 as payment for services performed last yeara check for $178 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

According to the Internal Revenue Code §162, deductible trade or business expenses must be which one of the following?

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

Beth operates a plumbing firm. In August of last year, she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

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

Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.

A fiscal tax year can end on the last day of any month other than December.

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year, Todd made $426,500 of sales on account, and $66,600 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

Kip started a wholesale store this year selling bulk peanut butter. In January of this year, Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July, Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year-end. What is Kip's ending inventory under the FIFO cost-flow method?

George operates a business that generated revenues of $55 million and allocable taxable income of $1.30 million. Included in the computation of allocable taxable income were deductible expenses of $242,500 of business interest and $252,500 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Brad operates a storage business on the accrual method. On July 1, Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance cover the next 12 months. What is Brad's deduction for the rent and insurance?

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1 ^st of this year, Mike received $15,000 for three outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next three summers, beginning this year. How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

Which of the following is a true statement about impermissible accounting methods?

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers)of $3 million this year. Taxable income included $75,000,000 of revenue and $350,000 of interest income. What is Sandy Bottoms's domestic maximum interest expense deduction for the year?

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year, Manley's firm had an allowance for doubtful accounts with a balance of $16,000. At the end of the year, Manley recorded bad debt expense of $22,800 and the balance of doubtful accounts had increased to $18,200. What is Manley's deduction for bad debt expense this year?

Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year, Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: What amount of travel expenditures can Sam deduct?

Judy is a self-employed musician who performs for a variety of events. This year, Judy was fined $340 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $820 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 $34,800 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 $53,200 rather than $34,800. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

This year Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments). What amount of these expenses may Clark deduct as business expenses?