Exam 5: Introduction to Business Expenses

Jack and Cheryl own a cabin near Copper Mountain, Colorado. During the year, Jack and Cheryl rent the cabin for 30 days to friends for $1,800. Jack and Cheryl use the cabin a total of 60 days during the year. After making the appropriate allocation of planned expenses between personal and rental use, the following rental loss was determined: ? Rental income \ 1,800 Property taxes (250) Mortgage interest (950) Repairs and maintenance (200) Utilities (300) Depreciation (400) Rental loss \ (300) How should Jack and Cheryl report the rental income and expenses for the forthcoming year? I.Only expenses up to the amount of $1,800 rental income may be deducted for the year. II.Only depreciation in the amount of $100 may be deducted. III.The amount of the disallowed depreciation deduction ($300) can be carried forward. IV.Nothing needs to be reported. ?

Devery, Inc. sells high tech machine parts that are fully warranted against defects. Based on prior years experience they can expect to incur $20,000 of warranty expense on current sales. They are on the accrual basis, and the warranty expense is based on a reasonable estimate, so Devery can deduct the $20,000.

Which of the following is/are currently deductible trade or business expenses? I.Personal property taxes on a hot air balloon operated as a hobby. II.Interest paid on the mortgage note on a business warehouse. ​

Which of the following people are currently engaged in a trade or business? I.Willie devotes 45 hours per week to betting on horse races. Although he intends to win large sums, he has failed to win the big one. He considers his betting activities his job and relies on his meager winnings to support his family. II.Daryl owns 214 home sites in and around Orlando, Florida. He bought these vacant lots several years ago in hoping that they would appreciate in value so he could sell them at a profit. Because of the recreational activities in the area, the building lots are worth several times his original cost. He is getting the lots ready to sell this year. ​

If someone provides a taxpayer with either property or services, economic performance occurs when

Which of the following individuals is involved in a trade or business? I.Lil owns a farm near Lafayette, Indiana. She leases the property to Cal, who operates the farm for himself. Lil receives 10% of Cal's net income as part of the lease agreement but has no responsibilities for the farming operation. II.Lorraine owns a warehouse located in Brooklyn NY. She paid $250,000 for the real estate several years ago. It is now appraised at over $1,000,000, but she still uses the building only to store her painting collection. ​

Generally income tax accounting methods are designed to result in I.a proper matching of expenses to the revenues being generated. II.a denial of a current deduction for costs that will not have to be paid in the near future. ​

James rents his vacation home for 30 days during the year and lives in it personally for 10 days. He receives rents of $4,000 and incurs the following expenses before allocation: ? Property taxes \ 2,000 Utilities 800 Depreciation 4,200 What is James' income or loss from the rental property?

Shaheen owns 2 rental properties. She hires her 21 year old son, who is a junior at State College, to obtain tenants, negotiate leases, make arrangements for repairs, and pay expenses related to the properties. I.Shaheen's sale of the properties will result in a capital gain or loss. II.Shaheen's sale of the properties at a loss results in a current-year loss deduction of no more than $3,000. ​

An exception to the economic performance test allows the deduction of year-end accruals if I.The liability exists and the amount of the liability can be reasonably estimated. II.Economic performance occurs within the shorter of 8 1/2 months after the close of the tax year or a reasonable time after the close of the tax year ​

Walter pays interest expense of $2,100 to acquire his investment portfolio during the current year. Walter receives $5,000 in interest from investments in General Motors and Xerox bonds, and $2,500 in interest from investments in City of San Francisco bonds. How much may Walter deduct for the current year?

Kelly buys a new Lexus for $48,750 in the current year to use in her commercial real estate business. Kelly cannot deduct the cost of the automobile in the current year, because

Tom, Dick, and Harry operate Quality Stores. Based on advice from Tom's sister, a CPA, the three form a partnership. Tom owns 50%; Dick and Harry each own 25%. For the year, Quality Stores reports the following: ? Sales revenues \ 800,000 Business expenses (440,000) Charitable Contributions (4,000) Short-term capital gains 26,000 Long-term capital losses (14,000) Taxable income \ 368,000 By how much will Tom's adjusted gross income increase because of the above?

In which of the following independent situations is the taxpayer entitled to deduct expenses related to the home office? I.A real estate agent employed by a local real estate agency owns several rental properties. She regularly and exclusively uses a second bedroom in her home solely as an office for bookkeeping and other activities related to management of the rental properties. She has no other place to perform these functions. II.An attorney employed by a large law firm frequently brings work home from the office. She uses a study in her home for doing this work as well as managing her investment portfolio. ​

Match the proper deduction method with the correct expenditures. -Investment interest expense related to earning interest from municipal bonds

Larry is a history teacher. He subscribes to several periodicals about teaching history and judging history fairs. This year Larry spends $285 on subscriptions to various periodicals. Discuss the deductibility of the expenditures for tax purposes.

Charlotte traveled to Annapolis to attend a three-day business conference. After her meetings concluded, she stays 2 additional days sightseeing. Charlotte's airfare is $400 and pays $110 per night for lodging, $60 a day for meals, and $20 a day for incidentals. How much of Charlotte's costs can be deducted as a business expense?

The Business Purpose Concept means I.that the economic purpose of the transaction must exceed the tax avoidance motive. II.that the taxpayer's dominant motive for an expenditure is to reduce taxation. ​

A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

Ona is a professional musician. She prepared her music teacher's tax return in exchange for music lessons. Since she is a cash basis taxpayer, she cannot take a deduction for the music lessons.