Question 1

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Accepted Answer

A) True 
 B)False

Question 2

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss that is not properly allocable to a trade or business.

Accepted Answer

A) True 
 B)False

Question 3

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $13,400 in rebates and was liable for an additional $8,200 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Accepted Answer

A)  $13,400 because rebates are payment liabilities. 
B)  $21,600 because Big Homes is an accrual-method taxpayer. 
C)  $21,600 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year. 
D)  $13,400 because the $8,200 liability is not fixed and determinable. 
E)  Big Homes is not entitled to a deduction because rebates are against public policy.

Question 4

Which of the following is a payment liability?

Accepted Answer

A)  Tort claims 
B)  Refunds 
C)  Insurance premiums 
D)  Real estate taxes 
E)  All of the choices are correct

Question 5

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 the choices are correct.

Question 6

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

Accepted Answer

A)  A fine for a zoning violation. 
B)  A tax underpayment penalty. 
C)  An "under the table" payment to a government representative to obtain a better price for raw materials. 
D)  A contribution to the mayor's political campaign fund. 
E)  An arm's length payment to a related party for emergency repairs of a sewage line.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A)  $100 
B)  $300 
C)  $350 
D)  $270 
E)  $520

Question 9

For purposes of the business interest limitation, adjusted taxable income is defined as taxable income allocable to the business computed without regard to which of the following:

Accepted Answer

A)  interest income, depreciation, amortization, or depletion; interest expense; and net operating loss deductions. 
B)  30 percent of revenue after deducting depreciation and interest expense. 
C)  Debt invested in the business. 
D)  interest income after deducting 30 percent of all deductible expenses. 
E)  None of the choices are correct.

Question 10

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $3 million this year. Taxable income was computed on $50 million of revenues and included $140,000 of interest income. The company paid $454,500 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Accepted Answer

The answer of Rock Island Corporation generated taxable income (before...

Question 11

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

Accepted Answer

A)  A deduction for the insurance premium would offset taxable income without the potential for the proceeds generating taxable income. 
B)  The federal government does not want to subsidize insurance companies. 
C)  It is impractical to trace insurance premiums to the receipt of proceeds. 
D)  Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code. 
E)  This rule was grandfathered from a time when the Internal Revenue Code disallowed all insurance premiums deductions.

Question 12

The deduction for business interest expense is limited in 2020 to the sum of (1) business interest income and (2) 40 percent of the adjusted taxable income of the taxpayer for the taxable year.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is a true statement?

Accepted Answer

A)  Meals are never deductible as a business expense. 
B)  An employer can only deduct half of any meals provided to employees as compensation. 
C)  The cost of business meals must be reasonable. 
D)  A taxpayer can only deduct a meal for a client if business is discussed during the meal. 
E)  None of the choices are true.

Question 14

A short tax year can end on any day of any month other than December.

Accepted Answer

A) True 
 B)False

Question 15

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

Accepted Answer

A) True 
 B)False

Question 16

Only half the cost of a business meal is deductible even if the meal is extravagant.

Accepted Answer

A) True 
 B)False

Question 17

Jones operates an upscale restaurant and he pays experienced cooks $36,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $40,800 per year. Which of the following is a true statement about this transaction?

Accepted Answer

A)  Jones will be allowed to deduct $40,800 only if his son eventually develops into an expert cook. 
B)  Jones will be allowed to accrue $40,800 only if he pays his son in cash. 
C)  Jones will be allowed to deduct $36,000 as compensation and another $4,800 can be deducted as an employee gift. 
D)  Jones is not entitled to any business deduction until the son is an experienced cook. 
E)  None of the choices are true.

Question 18

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Accepted Answer

A)  $12,000 because rebates are payment liabilities. 
B)  $19,500 because Big Homes is an accrual-method taxpayer. 
C)  $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year. 
D)  $12,000 because the $7,500 liability is not fixed and determinable. 
E)  Big Homes is not entitled to a deduction because rebates are against public policy.

Question 19

Gabby operates a pizza delivery service. This year, she paid delivery personnel $18,000 in salary. She carefully documented the business use of the auto (11,700 miles this year), and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

Accepted Answer

The answer of Gabby operates a pizza delivery service. This...

Question 20

Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $290 for the meal andseparately paid $250 for the theater 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)  $270 
C)  $145 
D)  $125 
E)  None-the meals and entertainment are not deductible except during travel.

Exam 1: Business Income, Deductions, and Accounting Methods

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss that is not properly allocable to a trade or business.

Which of the following is a payment liability?

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

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

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

For purposes of the business interest limitation, adjusted taxable income is defined as taxable income allocable to the business computed without regard to which of the following:

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

The deduction for business interest expense is limited in 2020 to the sum of (1) business interest income and (2) 40 percent of the adjusted taxable income of the taxpayer for the taxable year.

Which of the following is a true statement?

A short tax year can end on any day of any month other than December.

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

Only half the cost of a business meal is deductible even if the meal is extravagant.

Jones operates an upscale restaurant and he pays experienced cooks $36,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $40,800 per year. Which of the following is a true statement about this transaction?