Question 1

Discuss whether the following expenditures meet the ordinary, necessary, and reasonable requirements for deductibility.
a.Mortimer owns a shoe store. Every August Mortimer has a "Back-to-School" sale. To promote that event Mortimer spends $2,000 on newspaper and radio advertising. Generally, this event generates about $85,000 in sales. These sales revenues are about twice the level of sales in other months.
b.Wilma bought a small manufacturing business that had been declared bankrupt. To retain the current sales force, she pays some of the obligations owed to these people by the former owners. Wilma has no legal obligation to pay these debts.
c.Ned owns a large sporting goods store. Nick's 17-year-old son, Tony, works in the store when time permits. Nick pays Tony $10 per hour because he has worked in the store several years. Other high school age individuals also work at the store and perform functions requiring less experience than Tony. They are paid $8 per hour.
d.Art is a self-employed CPA. Last month he attended an AICPA Continuing Education course that cost him $750. In addition to the course registration fee, Art incurred $800 in travel expenses to attend the course.
e.Elvira is a stockholder in over 100 different corporations. However, she does not own more than 10 shares of stock in any one company. She enjoys attending annual stockholder meetings and often gives her "two cents worth" about issues affecting the companies' operations. In the past year Elvira spent $7,540 to attend the stockholder meetings to help protect her investments.

Accepted Answer

The answer of Discuss whether the following expenditures meet the...

Question 2

Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds.

Accepted Answer

The answer of Explain the rationale for disallowing the deduction...

Question 3

Match each statement with the correct term below.
-Production-of-income expense

Accepted Answer

A) Automobile used 75% for business. 
B) Investment interest expense on loan to acquire municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Expenses related to royalty income
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 4

Morgan, a banker, is an amateur photographer who takes pictures at weddings and parties. He earned $1,000 but incurred $1,200 in related expenses. He will have to include the $1,000 in income but will not get any benefit from the expenses.

Accepted Answer

A) True 
 B)False

Question 5

Match the proper deduction method with the correct expenditures.
-Start-up costs over $5,000.

Accepted Answer

A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure

Question 6

For a taxpayer to be engaged in a trade or business, the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Accepted Answer

A) True 
 B)False

Question 7

Match each statement with the correct term below.
-Home office deduction

Accepted Answer

A) Automobile used 75% for business. 
B) Investment interest expense on loan to acquire municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Expenses related to royalty income
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 8

Marlene is a single taxpayer with an adjusted gross income of $140,000. In addition to her personal residence, Marlene owns a ski cabin in Vail. She uses the cabin for 40 days during the current year and rents it out to unrelated parties for 80 days, receiving rent of $10,000. Marlene's costs before any allocation related to the cabin are as follows:
?
$$\begin{array} { l r } 
\text { Mortgage interest and property taxes } & \$ 9,000 \
\text { Utilities, maintenance, and repairs } & 4,500 \
\text { Depreciation } & 6,000
\end{array}$$
Based on the above information, what is her allowable depreciation deduction?

Accepted Answer

A) $- 0 - 
B) $1,000 
C) $3,000 
D) $4,000 
E) $6,000

Question 9

Match each statement with the correct term below.
-Ordinary Expense

Accepted Answer

A) Specifically disallowed. 
B) Appropriate and helpful. 
C) Considered a trade or business. 
D) Not considered a trade or business. 
E) Problems with this generally arise with related parties.
F)This is met when services or property are provided to the taxpayer.
G)Normal, common, and accepted but not necessarily regularly recurring.
H)This is met when the existence and the amount of a liability have been established.

Question 10

Which of the following production of income expenses would be deductible:
I.Interest expense on loan to acquire U.S. Treasury notes.
II.Interest expense on loan to acquire IBM Corporate bonds.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 11

Mike and Pam own a cabin near Teluride, Colorado. In the current year the cabin was rented for 8 days to friends. Mike and Pam used the cabin a total of 82 days during the same year. After allocating the expenses between personal and rental use, the following rental loss was determined:
?
$$\begin{array} { l r } 
\text { Rental income } & \$ 700 \
\text { Property taxes } & ( 250 ) \
\text { Mortgage interest } & ( 300 ) \
\text { Repairs and maintenance } & ( 100 ) \
\text { Utilities } & ( 150 ) \
\text { Rental loss } & \$ ( 100 )
\end{array}$$
How should Mike and Pam report the rental income and expenses for last year?

Accepted Answer

A) Report the $100 loss for AGI. 
B) Include the $700 in gross income, but no deductions are allowed. 
C) Only expenses up to the amount of $700 rental income may be deducted. 
D) Report the interest ($300) and taxes ($250) as itemized deductions and the other expenses for AGI. 
E) No reporting for the rental activity is necessary.

Question 12

Match each statement with the correct term below.
-Active Investor

Accepted Answer

A) Specifically disallowed. 
B) Appropriate and helpful. 
C) Considered a trade or business. 
D) Not considered a trade or business. 
E) Problems with this generally arise with related parties.
F)This is met when services or property are provided to the taxpayer.
G)Normal, common, and accepted but not necessarily regularly recurring.
H)This is met when the existence and the amount of a liability have been established.

Question 13

To be deductible, the dominant motive for incurring an expense must be

Accepted Answer

A) the relationship to a business activity. 
B) to reduce income taxes. 
C) tax avoidance. 
D) the intent to earn a profit. 
E) personal.

Question 14

Match the proper deduction method with the correct expenditures.
-Betterment

Accepted Answer

A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure

Question 15

Pamela owns the building where her plumbing supply business is located. This year she put on vinyl siding to replace the weathered wood siding on her building. The cost of the new siding can be expensed in the current year.

Accepted Answer

A) True 
 B)False

Question 16

Indicate which of the following statements is/are correct:
I.An accrual basis taxpayer who gives a creditor his note payable in payment of a claim may deduct the related expense when the note is given.
II.When a cash basis taxpayer uses a credit card to pay for an expense it can deduct the expense when the expense is charged to the credit card..
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 17

Match the proper deduction method with the correct expenditures.
-Fire and casualty insurance premium on business warehouse

Accepted Answer

A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure

Question 18

Amy borrowed $25,000 for her business from a local bank two years ago. To increase her deductions for 2018, she pays December interest of $400 and prepays January and February interest totaling $800 on December 30, 2018. The maturity date of the note is November 30, 2019. How much of the interest that she paid in December is deductible in 2018?
I.If she is a cash-basis taxpayer, Amy's interest deduction is $1,200.
II.If she is an accrual-basis taxpayer, Amy's interest deduction is $400.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 19

Which of the following requirements does not have to be met for a business or investment expense to be deductible:

Accepted Answer

A) Be ordinary and necessary. 
B) Be reasonable in amount. 
C) Be recurring. 
D) Be the taxpayer's own expense. 
E) All of the above must be met.

Question 20

Tom and RoseMary own a cabin near Stowe, Vermont. During the current year the cabin is rented for 31 days for $1,800. Tom and RoseMary used the cabin a total of 12 days during the year. After making the appropriate allocation of expenses between personal and rental use, the following rental loss was determined:
?
$$\begin{array} { l c } 
\text { Rental income } & \$ 1700 \
\text { Property taxes } & ( 150 ) \
\text { Mortgage interest } & ( 950 ) \
\text { Repairs and maintenance } & ( 400 ) \
\text { Utilities } & ( 300 ) \
\text { Depreciation } & ( 200 ) \
\text { Rental loss } & \$ ( 300 )
\end{array}$$
How should Tom and RoseMary report the rental income and expenses for the current year?

Accepted Answer

A) Include the $1,700 in gross income, but no deductions are allowed. 
B) Report the $300 loss for AGI. 
C) Only expenses up to the amount of $1,700 rental income may be deducted in the current year. 
D) Report the interest ($950) and taxes ($150) as itemized deductions and the other expenses for AGI. 
E) No reporting for the rental activity should be reported.

Exam 5: Introduction to Business Expenses

Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds.

Match each statement with the correct term below. -Production-of-income expense

Morgan, a banker, is an amateur photographer who takes pictures at weddings and parties. He earned $1,000 but incurred $1,200 in related expenses. He will have to include the $1,000 in income but will not get any benefit from the expenses.

Match the proper deduction method with the correct expenditures. -Start-up costs over $5,000.

For a taxpayer to be engaged in a trade or business, the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Match each statement with the correct term below. -Home office deduction

Match each statement with the correct term below. -Ordinary Expense

Which of the following production of income expenses would be deductible: I.Interest expense on loan to acquire U.S. Treasury notes. II.Interest expense on loan to acquire IBM Corporate bonds. ​

Match each statement with the correct term below. -Active Investor

To be deductible, the dominant motive for incurring an expense must be

Match the proper deduction method with the correct expenditures. -Betterment

Pamela owns the building where her plumbing supply business is located. This year she put on vinyl siding to replace the weathered wood siding on her building. The cost of the new siding can be expensed in the current year.

Match the proper deduction method with the correct expenditures. -Fire and casualty insurance premium on business warehouse

Which of the following requirements does not have to be met for a business or investment expense to be deductible:

Which of the following production of income expenses would be deductible: I.Interest expense on loan to acquire U.S. Treasury notes. II.Interest expense on loan to acquire IBM Corporate bonds.