Exam 9: Business Income, Deductions, and Accounting Methods

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?

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

Mike operates a fishing outfitter as an accrual-method sole proprietorship.On March 1ˢᵗ 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 payment liability?

Which of the following is a true statement?

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?

Which of the following business expense deductions is most likely to be unreasonable in amount?

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

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?

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

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.

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

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

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

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

Sandy Bottoms Corporation generated taxable income (before the domestic manufacturing deduction)of $3 million this year.The total income included $2,350,000 of qualified production activities income.The company paid $460,000 in W-2 wages to generate the qualified production activity income.What is Sandy Bottom's domestic manufacturing 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 $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?

Bob operates a clothing business using the accrual method over a calendar year.In October of last year,Bob contracted with his father,Tim,for consulting advice.Tim is a cash basis calendar year taxpayer and he billed Bob for $6,000 of consulting fees.This amount was comparable to amounts charged by other consultants (a reasonable amount).Bob paid $2,500 of the consulting fee by December 31ˢᵗ of last year,but the remaining $3,500 was not paid until January of this year.When can Bob deduct the consulting fee?

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?

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