Exam 8: Business Income, Deductions, and Accounting Methods

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.

Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

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?

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction

David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows: February thru December January Receipts \ 112,000 10,400 Expenses \ 84,500 6,200 What income should David report from his sole proprietorship?

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?

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

Which of the following is a true statement about travel that has both business and personal aspects?

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?

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

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

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

Alvin is a self-employed sound technician who reports on the cash method and calendar year. Alvin has a shop in Austin, Texas, but he spends much of his time away from his shop traveling to and from various concerts around the country. Alvin leases a truck to move his equipment around the country and this year he spent $12,000 in lease payments and paid $18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips. What amount of these expenses may Alvin deduct as business expenses?

Bill operates a proprietorship using the cash method of accounting, and this year he received the following payments: • $100 in cash from a customer for services rendered this year • a promise to pay $200 from a customer for services rendered this year • tickets to a football game worth $250 as payment for services performed last year • a check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

Which of the following is a true statement about impermissible accounting methods?

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

Individual proprietors report their business income and deductions on:

Sole proprietorships must use the same tax year as the proprietor of the business.