Exam 8: Business Income, Deductions, and Accounting Methods

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?

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?

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 the Todd's §481 adjustment for this year?

Taffy Products uses the accrual method and reports on a calendar year. On July 1st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of their warehouse. The rent and insurance covers the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

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: Course Tuition $\quad\quad\quad\quad\quad\quad\quad\quad\quad\$ 2,500$ Air Fare $\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad800$ Hotel (10 nights) $\quad\quad\quad\quad\quad\quad\quad\quad1,200$ Rental car (10 days) $\quad\quad\quad\quad\quad\quad\quad900$ Meals (10 days) $\quad\quad\quad\quad\quad\quad\quad\quad1,500$ What amount of travel expenditures can Sam deduct?

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?

This year Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments). What amount of these expenses may Clark deduct as business expenses?

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

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

Rock Island Corporation generated taxable income (before the domestic production activities deduction) of $10 million this year. The total income included $4,500,000 of qualified production activities income. The company paid $500,000 in W-2 wages to generate the qualified production activity income. What is Rock Island's domestic production activities deduction for the year?

Which of the following is a true statement?

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.

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

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

Taxpayers must maintain written contemporaneous records of business purpose when entertaining clients in order to claim a deduction for the expenditures.

Which of the following is a true statement about the domestic production activities deduction?

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?

Joe is a self employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business and at year end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year end. Which of the following is a true statement?

Qualified production activity income for calculating the domestic production activities deduction is limited to taxable income for a business or modified AGI for an individual.