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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 21

True/False

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

A) True
B) False

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Question 22

Multiple Choice

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Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year.This year he hired his son as an apprentice cook.Jones agreed to pay his son $40,000 per year.Which of the following is a true statement about this transaction?

A) Jones will be allowed to deduct $40,000 only if his son eventually develops into an expert cook.
B) Jones will be allowed to accrue $40,000 only if he pays his son in cash.
C) Jones will be allowed to deduct $35,000 as compensation and another $5,000 can be deducted as an employee gift.
D) Jones is not entitled to any business deduction until the son is an experienced cook.
E) None of the choices are true.

F) None of the above
G) A) and B)

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Question 23

Multiple Choice

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Which of the following is a true statement about travel that has both business and personal aspects?

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

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

David purchased a deli shop on February 1^st of last year and began to operate it as a sole proprietorship.David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship.He has summarized his receipts and expenses through January 31^st of this year as follows: $\begin{array}{l}&\text { Receipts } & \text { Expenses } \\\text { February through December last year }&\$ 112,000 & \$ 84,500 \\\text { January this year }&10,400 & 6,200\end{array}$ What income should David report from his sole proprietorship?

Adjusted taxable income is defined as follows for purposes of the business interest limitation:

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Danny owns an electronics outlet in Dallas.This year he paid $600 to register for a four-day course in management in Chicago.Danny paid $800 in airfare and $1,000 for five nights' lodging.After the course, Danny spent the last day sightseeing.During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car.What amount of these travel expenditures may Danny deduct as business expenses?

Clyde operates a sole proprietorship using the cash method.This year Clyde made the following expenditures: $480 to U.S.Bank for 12 months of interest accruing on a business loan from September 1 of this year through August 31 of next year even though only $160 of interest accrued this year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this year?

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

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

Crystal operates a business that provides typing and delivery services.This year Crystal spent $2,500 to purchase special shirts that identify her employees and provide some notoriety for her business.The shirts are especially colorful and include logos on the front pocket and the back.Besides salary payments, Crystal also compensates her employees by offering to pay whole life insurance premiums for any that want to provide insurance coverage for their beneficiaries.This year Crystal paid $5,000 in life insurance premiums.What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

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?

Ronald is a cash-method taxpayer who made the following expenditures this year.Which expenditure is completely deductible in this period as a business expense?

Which of the following is a true statement about accounting for business activities?

Individual proprietors report their business income and deductions on:

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

Which of the following is a payment liability?

This year Clark leased a car to drive between his office and various work sites.Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments) .What amount of these expenses may Clark deduct as business expenses?