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Exam 8: Business Income, deductions, and Accounting Methods

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Question 21

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Which of the following is a true statement about impermissible accounting methods?

A) An impermissible method is adopted by using the method to report results for two consecutive years.
B) An impermissible method may never be used by a taxpayer.
C) Cash method accounting is an impermissible method for partnerships and Subchapter S electing corporations.
D) There is no accounting method that is impermissible.
E) None of the choices are true.

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

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Question 22

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

A) A deduction for the insurance premium would offset taxable income without the potential for the proceeds generating taxable income.
B) The federal government does not want to subsidize insurance companies.
C) It is impractical to trace insurance premiums to the receipt of proceeds.
D) Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code.
E) This rule was grandfathered from a time when the Internal Revenue Code disallowed all insurance premiums deductions.

F) A) and E)
G) All of the above

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Question 23

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Bryon operates a consulting business and he usually works alone.However,during the summer Bryon will sometimes hire undergraduate students to collect data for his projects.This past summer Bryon hired Fred,the son of a prominent businessman,for a part-time summer job.The summer job usually pays about $17,000,but Bryon paid Fred $27,000 to gain favor with Fred's father.What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

Which of the following expenditures is most likely to be deductible for a construction business?

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

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

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

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

Paris operates a talent agency as a sole proprietorship,and this year she incurred the following expenses in operating her talent agency.What is the total deductible amount of these expenditures? $1,000 dinner with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting

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 1ˢᵗ of year 1 through May 31ˢᵗ year 3.When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

A fiscal tax year can end on the last day of any month other than December.

Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

Shelley is employed in Texas and recently attended a two-day business conference at the request of her employer.Shelley spent the entire time at the conference and documented her expenditures (described below) .What amount can Shelley deduct if she is not reimbursed by her employer? $\begin{array}{l}\begin{array}{lll}\text { Airfare to New Jersey}\\\text { Meals}\\\text { Lodging in New Jersey}\\\text { Rental car}\\\end{array}\begin{array}{lll}\$2,000 \\220 \\450 \\180\end{array}\end{array}$

Which of the following is a payment liability?

George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million.Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation.What is the maximum business interest deduction that George will be eligible to claim this year?

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.

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

Sandy Bottoms Corporation generated taxable income (before depreciation,interest expense and any tax loss carryovers)of $3 million this year.Taxable income included $75,000,000 of revenue and $350,000 of interest income.What is Sandy Bottom's domestic maximum interest expense deduction for the year?

Mike started a calendar year business on September 1ˢᵗ 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?