Question 1

Which of the following is a True statement?

Accepted Answer

A)  Meals are never deductible as a business expense. 
B)  An employer can only deduct half of any meals provided to employees. 
C)  The cost of business meals must be reasonable. 
D)  A taxpayer can only deduct a meal for a client if business is discussed during the meal. 
E)  None of the choices are True. 
A)  Meals are never deductible as a business expense. 
B)  An employer can only deduct half of any meals provided to employees. 
C)  The cost of business meals must be reasonable. 
D)  A taxpayer can only deduct a meal for a client if business is discussed during the meal. 
E)  None of the choices are True.

Question 2

Which of the following is a True statement about a request for a change in accounting method?

Accepted Answer

A)  Some requests are automatically granted. 
B)  Most requests require the permission of the Commissioner. 
C)  Many requests require payment of a fee and a good business purpose for the change. 
D)  Form 3115 is typically required to be filed with a request for change in accounting method. 
E)  All of the choices are True. 
A)  Some requests are automatically granted. 
B)  Most requests require the permission of the Commissioner. 
C)  Many requests require payment of a fee and a good business purpose for the change. 
D)  Form 3115 is typically required to be filed with a request for change in accounting method. 
E)  All of the choices are True.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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.

Accepted Answer

$66,000
The fine and political contribut

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is a True statement about accounting for business activities?

Accepted Answer

A)  An overall accounting method can only be adopted with the permission of the Commissioner. 
B)  An overall accounting method is initially adopted on the first return filed for the business. 
C)  The cash method can only be adopted by individual taxpayers. 
D)  The accrual method can only be adopted by corporate taxpayers. 
E)  None of the choices are True. 
A)  An overall accounting method can only be adopted with the permission of the Commissioner. 
B)  An overall accounting method is initially adopted on the first return filed for the business. 
C)  The cash method can only be adopted by individual taxpayers. 
D)  The accrual method can only be adopted by corporate taxpayers. 
E)  None of the choices are True.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

Accepted Answer

A)  Selling expenditures 
B)  Cost of manufacturing labor 
C)  Compensation of managers who supervise production 
D)  Cost of raw materials 
E)  All of the choices are subject to capitalization under the UNICAP rules 
A)  Selling expenditures 
B)  Cost of manufacturing labor 
C)  Compensation of managers who supervise production 
D)  Cost of raw materials 
E)  All of the choices are subject to capitalization under the UNICAP rules

Question 9

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

Accepted Answer

A)  taxable income allocable to the business computed without regard to interest income, and depreciation, amortization, or depletion, interest expense, and net operating loss deductions. 
B)  30 percent of revenue after deducting depreciation and interest expense. 
C)  Taxable income allocable to debt invested in the business. 
D)  Interest income after deducting 30 percent of all deductible expenses. 
E)  None of the choices are correct. 
A)  taxable income allocable to the business computed without regard to interest income, and depreciation, amortization, or depletion, interest expense, and net operating loss deductions. 
B)  30 percent of revenue after deducting depreciation and interest expense. 
C)  Taxable income allocable to debt invested in the business. 
D)  Interest income after deducting 30 percent of all deductible expenses. 
E)  None of the choices are correct.

Question 10

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Accepted Answer

A) True 
 B)False

Question 11

Riley operates a plumbing business and this year the 3-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?

Accepted Answer

A)  $6,000. 
B)  $14,000. 
C)  $5,800. 
D)  $4,600. 
E)  $5,300. 
A)  $6,000. 
B)  $14,000. 
C)  $5,800. 
D)  $4,600. 
E)  $5,300.

Question 12

Mike started a calendar year business on September 1ˢᵗ of this year by paying 12 months of 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?

Accepted Answer

A)  $12,000 under the cash method and $12,000 under the accrual method. 
B)  $4,000 under the cash method and $12,000 under the accrual method. 
C)  $12,000 under the cash method and $4,000 under the accrual method. 
D)  $4,000 under the cash method and $4,000 under the accrual method. 
E)  $4,000 under the cash method and zero under the accrual method. 
A)  $12,000 under the cash method and $12,000 under the accrual method. 
B)  $4,000 under the cash method and $12,000 under the accrual method. 
C)  $12,000 under the cash method and $4,000 under the accrual method. 
D)  $4,000 under the cash method and $4,000 under the accrual method. 
E)  $4,000 under the cash method and zero under the accrual method.

Question 13

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

Accepted Answer

A) True 
 B)False

Question 14

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 $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Accepted Answer

A)  $12,000 because rebates are payment liabilities. 
B)  $19,500 because Big Homes is an accrual method taxpayer. 
C)  $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing their tax return for this year. 
D)  $12,000 because the $7,500 liability is not fixed and determinable. 
E)  Big Homes is not entitled to a deduction because rebates are against public policy. 
A)  $12,000 because rebates are payment liabilities. 
B)  $19,500 because Big Homes is an accrual method taxpayer. 
C)  $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing their tax return for this year. 
D)  $12,000 because the $7,500 liability is not fixed and determinable. 
E)  Big Homes is not entitled to a deduction because rebates are against public policy.

Question 15

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 $2,280 of interest on a loan. The interest accrues evenly over 19 months ($120 per month) from June 1ˢᵗ of this year through December 31ˢᵗ of next year. In addition, on September 1ˢᵗ 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?

Accepted Answer

$1,440 = $840 interest ($120 × 7 months

Question 16

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?

Accepted Answer

$5,000
The all events test is satisfied

Question 17

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

Accepted Answer

A)  $4,000 for rent on his office that covers the next 24 months. 
B)  $3,000 for a new watch for the mayor to keep "good relations" with city hall. 
C)  $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business. 
D)  $55 to collect an account receivable from a customer who has failed to pay for services rendered. 
E)  None of the choices are completely deductible. 
A)  $4,000 for rent on his office that covers the next 24 months. 
B)  $3,000 for a new watch for the mayor to keep "good relations" with city hall. 
C)  $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business. 
D)  $55 to collect an account receivable from a customer who has failed to pay for services rendered. 
E)  None of the choices are completely deductible.

Question 18

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

Accepted Answer

A) True 
 B)False

Question 19

Crystal operates a business that provides typing and delivery services. This year Crystal spent $2,500 to purchase special shirts that identify her employees and provide some notoriety for her business. The shirts are especially colorful and include logos on the front pocket and back. Besides salary payments, Crystal also compensates her employees by offering to pay whole life insurance premiums for any that want to provide insurance coverage for their beneficiaries. This year Crystal paid $5,000 in life insurance premiums. What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

Accepted Answer

$7,500
Uniforms are deductible

Question 20

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.

Accepted Answer

A) True 
 B)False

Which of the following is a True statement?

Which of the following is a True statement about a request for a change in accounting method?

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

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.

Which of the following is a True statement about accounting for business activities?

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

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

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

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Mike started a calendar year business on September 1ˢᵗ of this year by paying 12 months of 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?

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

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.

An Introduction to Tax

Tax Compliance, the IRS, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview, Dependents, and Filing Status

Gross Income and Exclusions

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters

Exam 9: Business Income, Deductions, and Accounting Methods

Which of the following is a True statement?

Which of the following is a True statement about a request for a change in accounting method?

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

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.

Which of the following is a True statement about accounting for business activities?

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

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

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

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Mike started a calendar year business on September 1ˢᵗ of this year by paying 12 months of 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?

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

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.

An Introduction to Tax

Tax Compliance, the IRS, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview, Dependents, and Filing Status

Gross Income and Exclusions

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters