Exam 9: Business Income, Deductions, and Accounting Methods

Which of the following types of transactions may not typically be accounted for using the cash method for small proprietorships?

Even a cash method taxpayer must consistently use accounting methods that "clearly reflect income" for tax purposes.

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?

Murphy uses the accrual method and reports on a calendar year. This year Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1ˢᵗ of year 1 through May 31ˢᵗ year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

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.

A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the business.

Shadow Services uses the accrual method and reports on a calendar year. This year Shadow agreed to a uniform cleaning contract with Odie Cleaning. Under the contract Odie bills Shadow for cleaning services as the services are provided. At year end Shadow paid Odie $2,350 for the services rendered during the year. In addition, Shadow paid Odie $700 for cleaning services expected in January of next year. What amount, if any, can Shadow deduct for the cleaning services this year?

Which of the following is a payment liability?

David purchased a deli shop on February 1ˢᵗ 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 31ˢᵗ of this year as follows: What income should David report from his sole proprietorship?

Ranger Athletic Equipment uses the accrual method and reports on a calendar year. Ranger provides two-year warranties on all sales of equipment. This year Ranger estimated warranty expense for book purposes, and he accrued $1 million of warranty expenses. However, during the year Ranger only spent $400,000 repairing equipment under the warranty. What can Ranger deduct for warranty expense on the tax return for this year?

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

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?

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 Bottom's domestic maximum interest expense deduction for the year?

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

Uniform capitalization of indirect inventory costs is required for most very large taxpayers.

Individual proprietors report their business income and deductions on:

Which of the following expenses are completely deductible?

All taxpayers must account for taxable income using a calendar year.

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 $420,000 of sales on account and $64,000 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?