Question 1

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

Accepted Answer

A) whether an expenditure is related to a business activity 
B) whether an expenditure will be likely to produce income 
C) timeliness of an expenditure 
D) reasonableness of an expenditure 
E) All of these 
A) whether an expenditure is related to a business activity 
B) whether an expenditure will be likely to produce income 
C) timeliness of an expenditure 
D) reasonableness of an expenditure 
E) All of these

Question 2

Which of the following is a true statement?

Accepted Answer

A) Interest expense is not deductible if the loan is used to purchase municipal bonds. 
B) Insurance premiums are not deductible if paid for "key man" life insurance. 
C) One half of the cost of business meals is not deductible. 
D) All of these are true. 
E) None of these is truE.The deduction of each of the above expenditures is prohibited. 
A) Interest expense is not deductible if the loan is used to purchase municipal bonds. 
B) Insurance premiums are not deductible if paid for "key man" life insurance. 
C) One half of the cost of business meals is not deductible. 
D) All of these are true. 
E) None of these is truE.The deduction of each of the above expenditures is prohibited.

Question 3

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.

Accepted Answer

A) $1,300 "for AGI." 
B) $1,300 "for AGI" and $300 "from AGI." 
C) $480 "for AGI." 
D) $80 "for AGI" and $1,300 "from AGI." 
E) None of these.The correct answer is _________. 
A) $1,300 "for AGI." 
B) $1,300 "for AGI" and $300 "from AGI." 
C) $480 "for AGI." 
D) $80 "for AGI" and $1,300 "from AGI." 
E) None of these.The correct answer is _________.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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?

Accepted Answer

A) If he elects to treat the taxes as a recurring item,Joe can accrue and deduct $4,500 of taxes on the shop this year. 
B) The taxes are a payment liability. 
C) The taxes would not be deductible if Joe's business was on the cash method. 
D) Unless Joe makes an election,the taxes are not deductible this year. 
E) All of these are truE.Joe can elect to deduct the taxes accruing this year or he can elect to deduct them as recurring items.If neither election is made,then Joe deducts them in the year paid. 
A) If he elects to treat the taxes as a recurring item,Joe can accrue and deduct $4,500 of taxes on the shop this year. 
B) The taxes are a payment liability. 
C) The taxes would not be deductible if Joe's business was on the cash method. 
D) Unless Joe makes an election,the taxes are not deductible this year. 
E) All of these are truE.Joe can elect to deduct the taxes accruing this year or he can elect to deduct them as recurring items.If neither election is made,then Joe deducts them in the year paid.

Question 6

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic production activities deduction) .Included in income was $70,000 of qualified production activities income.George paid $60,000 of wages to employees engaged in domestic manufacturing.What domestic production activities deduction will George be eligible to claim this year?

Accepted Answer

A) $5,400 
B) $6,300 
C) $7,200 
D) $15,300 
E) $22,500 
A) $5,400 
B) $6,300 
C) $7,200 
D) $15,300 
E) $22,500

Question 9

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

Accepted Answer

A) when the title of the goods passes to the buyer. 
B) when the business receives payment. 
C) when payment is due from the buyer. 
D) the earliest of these three dates. 
E) None of thesE.The definition of all-events is when the right to income is fixed and determinable on the earliest of the three dates listed. 
A) when the title of the goods passes to the buyer. 
B) when the business receives payment. 
C) when payment is due from the buyer. 
D) the earliest of these three dates. 
E) None of thesE.The definition of all-events is when the right to income is fixed and determinable on the earliest of the three dates listed.

Question 10

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

Accepted Answer

A) An impermissible method is adopted by using the method to report results for two consecutive years. 
B) An impermissible method may never be used by a taxpayer. 
C) Cash method accounting is an impermissible method for partnerships and Subchapter S electing corporations. 
D) There is no accounting method that is impermissible. 
E) None of these is truE.A permissible method is adopted by using the method for one year. 
A) An impermissible method is adopted by using the method to report results for two consecutive years. 
B) An impermissible method may never be used by a taxpayer. 
C) Cash method accounting is an impermissible method for partnerships and Subchapter S electing corporations. 
D) There is no accounting method that is impermissible. 
E) None of these is truE.A permissible method is adopted by using the method for one year.

Question 11

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?

Accepted Answer

A) $4,000 for rent on his office that covers the next 24 months. 
B) $3,000 for a new watch for the mayor to keep "good relations" with city hall. 
C) $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business. 
D) $55 to collect an account receivable from a customer who has failed to pay for services rendered. 
E) None of these is completely deductiblE.The rent is prepaid and must be amortized,the watch is a bribe,the gift is too expensive for deduction (and doesn't qualify as entertainment) ,and although a cash method taxpayer cannot deduct bad debts,amounts paid to collect those receivables are fully deductible as an ordinary and necessary business expense. 
A) $4,000 for rent on his office that covers the next 24 months. 
B) $3,000 for a new watch for the mayor to keep "good relations" with city hall. 
C) $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business. 
D) $55 to collect an account receivable from a customer who has failed to pay for services rendered. 
E) None of these is completely deductiblE.The rent is prepaid and must be amortized,the watch is a bribe,the gift is too expensive for deduction (and doesn't qualify as entertainment) ,and although a cash method taxpayer cannot deduct bad debts,amounts paid to collect those receivables are fully deductible as an ordinary and necessary business expense.

Question 12

Kip started a wholesale store this year selling bulk peanut butter.In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000.In July Kip purchased three tubs for a total cost of $6,000.Finally,in November Kip bought two tubs for a total cost of $1,000.Kip sold six tubs by year end.What is Kip's ending inventory under the FIFO cost-flow method?

Accepted Answer

A) $12,000 
B) $6,000 
C) $5,000 
D) $2,500 
E) $1,000 
A) $12,000 
B) $6,000 
C) $5,000 
D) $2,500 
E) $1,000

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

After a business meeting with a prospective client Holly took the client to dinner and the theatre.Holly paid $290 for the meal and $250 for the theatre tickets,amounts that were reasonable under the circumstances.What amount of these expenditures can Holly deduct as a business expense?

Accepted Answer

A) $540 
B) $415 
C) $270 
D) None unless Holly discussed business with the client during the meal and the entertainment. 
E) None - the meals and entertainment are not deductible except during travel. 
A) $540 
B) $415 
C) $270 
D) None unless Holly discussed business with the client during the meal and the entertainment. 
E) None - the meals and entertainment are not deductible except during travel.

Question 15

Which of the following business expense deductions is most likely to be unreasonable in amount?

Accepted Answer

A) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees. 
B) Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations. 
C) Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client. 
D) All of these are likely to be unreasonable in amount.All three situations involve suspicious payments to a related taxpayer or with personal benefits. 
A) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees. 
B) Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations. 
C) Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client. 
D) All of these are likely to be unreasonable in amount.All three situations involve suspicious payments to a related taxpayer or with personal benefits.

Question 16

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

Accepted Answer

A) Spouse when the taxpayer is an individual. 
B) A partner when the taxpayer is a partnership. 
C) Brother when the taxpayer is an individual. 
D) A minority shareholder when the taxpayer is a corporation. 
E) All of these are related parties. 
A) Spouse when the taxpayer is an individual. 
B) A partner when the taxpayer is a partnership. 
C) Brother when the taxpayer is an individual. 
D) A minority shareholder when the taxpayer is a corporation. 
E) All of these are related parties.

Question 17

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

Accepted Answer

A) selling expenditures 
B) cost of manufacturing labor 
C) compensation of managers who supervise production 
D) cost of raw materials 
E) All of these are subject to capitalization under the UNICAP rules. 
A) selling expenditures 
B) cost of manufacturing labor 
C) compensation of managers who supervise production 
D) cost of raw materials 
E) All of these are subject to capitalization under the UNICAP rules.

Question 18

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

Accepted Answer

A) net income from selling or leasing property the taxpayer manufactured in the United States. 
B) revenue from selling or leasing property the taxpayer manufactured in the United States. 
C) revenue from selling or leasing property the taxpayer manufactured in the United States but the revenue was less that 50 percent of qualifying wages used in the production. 
D) 6 percent of revenue from selling or leasing property the taxpayer manufactured in the United States. 
E) None of these 
A) net income from selling or leasing property the taxpayer manufactured in the United States. 
B) revenue from selling or leasing property the taxpayer manufactured in the United States. 
C) revenue from selling or leasing property the taxpayer manufactured in the United States but the revenue was less that 50 percent of qualifying wages used in the production. 
D) 6 percent of revenue from selling or leasing property the taxpayer manufactured in the United States. 
E) None of these

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

Which of the following is a true statement?

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

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?

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

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

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

Which of the following is a true statement about impermissible 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?

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

After a business meeting with a prospective client Holly took the client to dinner and the theatre.Holly paid $290 for the meal and $250 for the theatre tickets,amounts that were reasonable under the circumstances.What amount of these expenditures can Holly deduct as a business expense?

Which of the following business expense deductions is most likely to be unreasonable in amount?

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

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

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Tax Overview

Gross Income and Exclusions

Individual Deductions

Individual Income Tax Computation and Tax Credits

Property Acquisition and Cost Recovery

Property Dispositions

Investments

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters

Exam 8: Business Income, Deductions, and Accounting Methods

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

Which of the following is a true statement?

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

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?

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

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

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

Which of the following is a true statement about impermissible 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?

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

After a business meeting with a prospective client Holly took the client to dinner and the theatre.Holly paid $290 for the meal and $250 for the theatre tickets,amounts that were reasonable under the circumstances.What amount of these expenditures can Holly deduct as a business expense?

Which of the following business expense deductions is most likely to be unreasonable in amount?

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

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

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Tax Overview

Gross Income and Exclusions

Individual Deductions

Individual Income Tax Computation and Tax Credits

Property Acquisition and Cost Recovery

Property Dispositions

Investments

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters