Exam 3: Business Income and Expenses Part I

Jasper owns a small retail store as a sole proprietor. The business records show that the cost of the store's inventory items has been steadily increasing. The cost of the end of the year inventory is $200,000 and the cost of the beginning of the year inventory was $250,000. Jasper uses the FIFO method of inventory valuation. Which of the following statements is true? ​

During the 2016 holiday season, Bob, a barber, gave business gifts to 34 customers. The values of the gifts, which were not of a promotional nature, were as follows: ​ 10 at $10 each 8 at $25 each 8 at $50 each 8 at $100 each ​ For 2016, what is the amount of Bob's business gift deduction?

If an employer chooses a per diem method of substantiation for travel expenses,

Richard operates a hair styling boutique out of his home. The boutique occupies 420 of the home's 1,200 square feet of floor space. Other information is as follows: What amount of income or loss from the boutique should Richard show on his return?

Natasha is a self-employed private language tutor. In 2016, she obtained her teaching credentials, hoping to receive a job as a seventh grade public school English teacher. She had the following education expenses for the year: Natasha also attended a seminar in Washington, D.C., titled "The Motivated Student." Her expenses for the trip are as follows: Determine how much of the above expenses are deductible on her Schedule C.

Sally and Martha are tax accountant partners operating a tax firm in San Diego. Every year, they attend the Tax Planning Forum in Las Vegas featuring nationally renowned tax experts. The Forum lasts for 2 days. One evening Sally and Martha attend a show and another evening they lose $10 gambling on the nickel slot machines. Their expenses are as follows: ​ Calculate the firm's deduction for attending this event.

Brandi operates a small business and employs three staff members, all of which perform the same tasks with more or less the same level of skill. Two of the staff members are paid wages of $10 per hour; however, the third staff member, Whiski, is Brandi's sister and earns $17 per hour. What amount per hour can Brandi deduct for ​wages paid to Whiski?

Gene is a self-employed taxpayer working from his home. His net income is $7,000 before home office expenses. His allocable home office expenses are $8,000 in total. How are the home office expenses treated on his current year tax return?

What is the advantage of carrying a net operating loss back against prior years' income rather than forward against future years?

Martin has a home office for his business as an agent for rock-and-roll bands. The business shows a loss of $2,000 before home office expenses. How should the home office expenses be treated?

Net operating losses may be carried forward indefinitely.

A taxpayer who adopts the LIFO method of inventory valuation for tax purposes may use the FIFO method for preparing financial statements.

If the taxpayer does not maintain adequate records of car expenses (i.e., gas, tires, car insurance, etc.), the standard mileage rate cannot be used.

Nancy owns a small dress store. During 2016, Nancy gives business gifts having the indicated cost to the following individuals: What is the amount of Nancy's deduction for business gifts?

Terry is a practicing attorney who decides to become an agent for musical groups on the side. Terry engages in the activity and has the following revenue and expenses: ​ a.What are four of the factors the IRS will consider when evaluating whether her activity is a hobby? b.If the activity is deemed to be a regular business, what is the amount of Terry's net income or loss from the activity? c.If the activity is deemed to be a hobby, what is the amount (if any) of Terry's expenses from the activity that may be deducted, before applying the 2 percent of AGI floor for miscellaneous itemized deductions?

Rick is a business adviser who lives in Escondido, California and works in San Diego. He makes a 70-mile round trip commute to his job every workday, for a total of 14,000 miles a year. In addition, he drives 1,000 miles throughout the year to visit clients from his office in San Diego. If Rick uses the standard mileage method for computing automobile expenses, what is his automobile expense deduction for 2016?

Choose the correct answer.

Bobby is an accountant who uses a portion of his home as his office. His home is 2,500 square feet and his office space occupies 1,500 square feet. Rent expense is $18,000 a year; utilities expense is $2,000 a year; and maintenance expense is $3,000 a year. What is the total amount of these expenses that can be allocated to his home office?

Sherri is a tax accountant. She prepared a large corporate tax return 2 years ago and billed $5,000 to her client. After 2 years of attempting to collect the money, it is clear that she will not be able to collect anything since the business has gone bankrupt. She reports income on her tax return on the accrual basis as she bills it, so the $5,000 was included in her taxable income 2 years ago. Can she claim a bad debt deduction for the $5,000? Explain.

Hope Springs, a teacher, loaned Hugh Owens, a friend, $10,000 to invest in real estate. Hugh declared bankruptcy in 2016 and cannot repay the $10,000. a.What is the nature of Hope's loss? b.Assuming Hope has no other capital transactions, is there a limit on the amount she may deduct for 2016? Explain. c.What amount of the loss may Hope deduct in 2016?