Exam 8: Business Income, Deductions, and Accounting Methods

Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: $\ \text{Course Tuition}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$2,500$ $\ \text{Air Fare}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad800$ $\ \text{Hotel (10 nights)}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad1,200$ $\ \text{Rental car (10 days)}\quad\quad\quad\quad\quad\quad\quad\quad\quad900$ $\ \text{Meals (10 days)}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad1,500$ What amount of travel expenditures can Sam deduct?

Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

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

Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last year?

A short tax year can end on any day of any month other than December.

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

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?

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

Which of the following is a payment liability?

Werner is the president and CEO of Acme, Inc. and this year he took a prospective client to dinner. During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters. After dinner the CEO took the client to a football game and no business was discussed. The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

Which of the following expenditures is most likely to be deductible for a construction business?

Ed is a self-employed heart surgeon who has incurred the following reasonable expenses. How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. $500 in meals while attending a medical convention in New York. $300 for tuition for an investment seminar "How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day.

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

The domestic production activities deduction is a deduction for the incremental cost of manufacturing tangible assets in the United States.

Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary. She carefully documented the use of the auto (11,700 miles this year) and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

Ajax Computer Company is an accrual method calendar year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for advertising time during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

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

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