Exam 6: Taxable Income from Business Operations

At the end of its taxable year, Gong Company accrued an expense for an account payable to Mexance Inc. Even if Gong and Mexance are related parties, Gong can deduct the accrued expense if Mexance also uses the accrual method of accounting for tax purposes.  

Taxable income is defined as gross income minus allowable deductions and credits.  

Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide professional services. Rukel completed the services on November 30, 2018, and immediately sent Bendom a bill for $37,750. Bendom paid the bill on January 4, 2019. Which of the following statements is false? 

Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.  

For tax purposes, income is recognized when all events have occurred that fix the taxpayer's right to receive the income and the amount of income can be determined with reasonable accuracy.  

Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.  

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true?  

The after-tax cost of a dollar of business meal expense is 79 cents for a taxpayer with a 21% marginal tax rate. 

Shey is single and operates two businesses. This year, business A generated $300,000 of taxable profit. Business B generated a $(625,000) loss. How much of Shey's business loss is not currently deductible due to the excess business loss limitation? 

Which of the following taxpayers is subject to the excess business loss limitation? 

Which of the following statements concerning the principle of accounting conservatism is true?  

For federal tax purposes, gross income from the sale of tangible goods is reduced by the seller's cost of goods sold.  

Which of the following statements most accurately defines taxable income from business operations? 

Which of the following statements describes a permanent book/tax difference? 

Which of the following does not result in a permanent book/tax difference? 

A taxpayer that operates more than one business may use a different method of accounting for each business.  

A temporary difference between book income and taxable income results when an item of income reflected on the books is never included in taxable income.  

Mr John Carre owns 67% of the stock of JC Inc. and is employed as the corporation's CEO. The corporation is a calendar year, accrual basis taxpayer. On December 14, 2018, the board of directors authorized a $45,000 year-end bonus for Mr Carre, which was paid to him on February 1, 2019. In which year can JC Inc. deduct the bonus? 

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.  

A corporation can't have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.