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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 1

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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 her part-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.

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$66,000.
The fine and political contribu...

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Question 2

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Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year.Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

A) Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.
B) Jim must defer the recognition of the income until the income is earned.
C) Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.
D) Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.
E) Jim can never defer the recognition of the prepayments of income.

F) C) and D)
G) C) and E)

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Question 3

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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?

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.

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

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey.After Shelley attended the conference, she had dinner with an old friend who lived nearby.Shelly documented her expenditures (described below) .What amount can Shelley deduct? $\begin{array}{llcc} \text {Airfare to New Jersey } & \$2,000\\ \text {Meals at the conference } &220\\ \text { Meal with ar old friend } &120\\ \text {Lodgirg ir New Jersey } &450\\ \text { Reratal car } &180\\\end{array}$

The full-inclusion method requires cash-basis taxpayers to include prepayments for goods or services into realized income.

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?

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?

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: $\begin{array}{llcc} \text { Advertising} & \$500 \\ \text {Car ard truck expenses } &1,360\\ \text { Depreciatior } &3,200\\ \text {Employee compensation } &5,000\\ \text { Education } &1,000\\\end{array}$ 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.

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

A business can deduct the cost of uniforms supplied to employees.

Which of the following is a true statement?

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

Marilyn operates a day care center as a cash-method sole proprietorship.On August 1^st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months.How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

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?

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?

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?

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

Colby Motors uses the accrual method and reports on a calendar year.In December of last year, Colby acquired auto repair equipment.As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years.Colby paid the cost of the warranty, $15,000, in January of this year.What can Colby deduct for the cost of the warranty on the tax return for last year?