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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 41

True/False

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

A) True
B) False

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Question 42

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When a taxpayer borrows money and invests the loan proceeds in municipal bonds, theinterest paid by the taxpayer on the debt will not be deductible.

A) True
B) False

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Question 43

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Which of the following is a true statement about a request for a change in accounting method?

The domestic production activities deduction is a deduction for the incremental cost of manufacturing tangible assets in the United States.

All taxpayers must account for taxable income using a calendar year.

Which of the following is likely to be a fully deductible business expense?

Judy is a self-employed musician who performs for a variety of events. This year Judy was fined$250 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June Judy fired herpart-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

Even a cash method taxpayer must consistently use accounting methods that "clearly reflect income" for tax purposes.

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

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

Individual proprietors report their business income and deductions on:

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?

Otto operates a bakery and is on the cash method and calendar year. This year one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire. Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage. What is Otto's casualty loss deduction?

Murphy uses the accrual method and reports on a calendar year. This year Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another$60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

Which of the following is a true statement about the domestic production activities deduction?

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

The all-events test for income determines the period in which income will be recognized for tax purposes.

Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.

Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.

The test for whether an expenditure is reasonable in amount is whether the expenditurewas for an "arm's length" amount.