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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 1

True/False

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Sole proprietorships must use the same tax year as the proprietor of the business.

A) True
B) False

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Question 2

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Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for a one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

A) $1 million
B) $500,000
C) $1.5 million
D) $1.5 million only if the professional golf tournament is played before April 15
E) No deduction can be claimed this year

F) B) and C)
G) C) and E)

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Question 3

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Taxpayers must maintain written contemporaneous records of business purpose when traveling in order to claim a deduction for the expenditures.

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.

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?

Taffy Products uses the accrual method and reports on a calendar year. On July 1^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of its warehouse. The rent and insurance cover the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1^st of year 1 through May 31^st of year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

Uniform capitalization of indirect inventory costs is required for most very large taxpayers.

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

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

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

Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time 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 but prior to filing his tax return. Which of the following is a true statement?

Bob operates a clothing business using the accrual method over a calendar year. In October of last year, Bob contracted with his father, Tim, for consulting advice. Tim is a cash-basis calendar-year taxpayer and he billed Bob for $6,000 of consulting fees. This amount was comparable to amounts charged by other consultants (a reasonable amount). Bob paid $2,500 of the consulting fee by December 31^st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?

Which of the following is a true statement?

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

Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

In order to deduct a portion of the cost of a business meal, which of the following conditions must be met?

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers)of $1 million this year. Taxable income was computed on $50 million of revenues and included $50,000 of interest income. The company paid $450,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

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?