Exam 9: Business Income, Deductions, and Accounting Methods

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers)of $3 million in 2020. Taxable income included $75,011,000 of revenue and $355,500 of interest income. What is Sandy Bottoms's maximum interest expense deduction for the year?

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. Shelley documented her expenditures (described below). What amount can Shelley deduct?

Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job. The summer job usually pays about $17,500, but Bryon paid Fred $29,000 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

For purposes of the business interest limitation, adjusted taxable income is defined as taxable income allocable to the business computed without regard to which of the following:

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 $2,940 of interest on a loan. The interest accrues evenly over 21 months ($140 per month)from June 1st of this year through December 31st of next year. In addition, on September 1st Anne also paid $3,400 for 20 months of professional liability insurance ($170 per month). What amount of interest and insurance can Anne deduct this 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?

Which of the following cannot be selected as a valid tax year-end?

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers)of $2 million this year. Taxable income was computed on $50 million of revenues and included $80,000 of interest income. The company paid $451,500 in interest expense. What is Rock Island's maximum business interest deduction for the 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?

Mike started a calendar-year business on September 1 ^st of this year by paying 12 monthsof rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

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?

Taxpayers must maintain written contemporaneous records of business purpose when traveling in order to claim a deduction for the expenditures.

Which of the following is a true statement about travel that has both business and personal aspects?

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 $14,000 in rebates and was liable for an additional $8,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this 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 $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense this year?

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

George operates a business that in 2020 generated revenues of $50 million and allocable taxable income of $630,000. Included in the computation of allocable taxable income were$903,500 of business interest expense, $23,500 of business interest income, and $870,250 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Taffy Products uses the accrual method and reports on a calendar year. On July 1 ^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of its warehouse. The rent and insurance cover the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million. Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Adjusted taxable income is defined as follows for purposes of the business interest limitation: