Exam 3: Business Income and Expenses, Part I

Curt is self-employed as a real estate salesman and drives his car frequently to take clients to see homes for sale. Curt drove his car 20,000 miles for business purposes and 25,000 miles in total. His actual expenses for operating the auto including depreciation are $10,000 since he drove it so much during the year. Curt has used the actual cost method since he started his business in 2012. How much is Curt's deductible auto expense for the year?

Michael has a very successful business as a financial consultant. Michael attends the following seminars: How much can Michael deduct as business education expenses?

Karen has a net operating loss in 2014. If she does not make any special elections, what is the first year to which Karen can carry the net operating loss? ​

Janine is a sole proprietor owning a small specialty store. The business records show that the cost of the store's individual inventory items has been steadily increasing. The cost of the end of the year inventory is $125,000 and the cost of the beginning of the year inventory was $150,000. Janine uses the LIFO method of inventory valuation. Which of the following statements is true?

Jess has had a couple of good years in his new business and generated large amounts of taxable income. In the current year, however, he has a net operating loss of $8,000. He is uncertain about the future of the business, and has a serious cash flow problem. As his tax accountant, how would you recommend Jess treat his net operating loss?

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?

Donald, a cash basis dentist, had $7,000 of uncollectible accounts receivable in 2014. Because Donald had always been a cash basis taxpayer, he had not reported the $7,000 in taxable income when the services were performed. ​ How much of the $7,000 bad debt can Donald take as a bad debt deduction on his 2014 tax return? Explain.

The standard mileage rate for automobiles in 2014 is 56 cents per mile.

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 2014?

Tim loaned a friend $4,000 to buy a used car. In the current year, Tim's friend declares bankruptcy and the debt is considered totally worthless. What amount may Tim deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?

Patrick has a business net operating loss of $70,000 in 2014. Patrick's business generated significant taxable profits in 2012 and in 2013. Which of the following is true? ​

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.

Sue is a small business owner who often gives gifts to clients. She gives a $40 gift to her client, Mr. Smith, and his wife. Sue spent $6 to wrap the gift. She also gave out 400 calendars with her company name on them. Each calendar cost $1. Sue also gave her secretary a $370 watch for his 10 years of service. How much of the above expenses may she deduct?

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?

Once a taxpayer uses the standard mileage method to determine the deduction for automobile expenses for the tax year, the standard mileage method must be used in all subsequent years.

Hope Springs, a teacher, loaned Hugh Owens, a friend, $10,000 to invest in real estate. Hugh declared bankruptcy in 2014 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 2014? Explain. c. What amount of the loss may Hope deduct in 2014?

There is a limitation of $25 per donee on the deduction of gifts to employees for length of service.

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 educational expense deduction for the current year.

Christine is a self-employed tax accountant who drives her car to visit clients occasionally throughout the year. She drives her car 1,000 miles for business, 5,000 miles for commuting and 5,000 miles for personal use. Assuming that Christine uses the standard mileage method, how much is her auto expense for the year? Where in her tax return should Christine claim this deduction?

David purchases a yacht solely for the purpose of entertaining real estate clients. He wishes to position himself as a high-end real estate salesperson specializing in very expensive residences and uses the yacht only for business entertainment. During 2014, his expenses for maintaining the yacht, including depreciation, were $28,000. In addition, he incurred $9,000 of catering expenses for meals he provided to business clients on the yacht. What is David's tax deduction in 2014? ​ Explain.