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Exam 9: Business Income,deductions,and Accounting Methods

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Question 51

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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.

A) True
B) False

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Question 52

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Alvin is a self-employed sound technician who reports on the cash method and calendar year.Alvin has a shop in Austin,Texas,but he spends much of his time away from his shop traveling to and from various concerts around the country.Alvin leases a truck to move his equipment around the country and this year he spent $12,000 in lease payments and paid $18,000 for gas,oil,and repairs.Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips.What amount of these expenses may Alvin deduct as business expenses?

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$25,000 = (30/36 × [$18,000 + ...

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Question 53

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Brad operates a storage business on the accrual method.On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse.The rent and insurance cover the next 12 months.What is Brad's deduction for the rent and insurance?

Manley operates a law practice on the accrual method and calendar year.At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000.At the end of the year,Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000.What is Manley's deduction for bad debt expense this year?

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

Smith operates a roof repair business.This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business: The education expense was for a two-week,nighttime course in business management.Smith believes the expenditure should qualify as an ordinary and necessary business expense.What net income should Smith report from his business? Smith is on the cash method and calendar year.

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

Which of the following expenditures is completely deductible?

Which of the following is a true statement?

Although expenses associated with illegal activities are not deductible,political contributions can be deducted as long as the donation is not made to a candidate for public office.

A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the business.

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year.On September 1^st of this year Anne paid $2,280 of interest on a loan.The interest accrues evenly over 19 months ($120 per month)from June 1^st of this year through December 31^st of next year.In addition,on September 1^st Anne also paid $2,700 for 18 months of professional liability insurance ($150 per month).What amount of interest and insurance can Anne deduct this year?

Werner is the president and CEO of Acme,Inc.,and this year he took a prospective client to dinner.During the dinner Werner and the client discussed a proposed contract for over $6 million as well as personal matters.After dinner Werner took the client to a football game and no business was discussed.Werner paid $1,220 for an expensive (but not extravagant)dinner and spent $600 for tickets to the game.What is the deductible amount of these expenses?

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.

According to the Internal Revenue Code §162,deductible trade or business expenses must be which one of the following?

Don operates a taxi business,and this year one of his taxis was damaged in a traffic accident.The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident.The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost.What is the amount of Don's casualty loss deduction?

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

Mike started a calendar-year business on September 1^st of this year by paying 12 months of rent on his shop at $1,000 per month.What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Beth operates a plumbing firm.In August of last year she signed a contract to provide plumbing services for a renovation.Beth began the work that August and finished the work in December of last year.However,Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full.When should Beth recognize income under the accrual method of accounting?