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Exam 8: Business Income, deductions, and Accounting Methods

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Question 51

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

A) True
B) False

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Question 52

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The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

A) True
B) False

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Question 53

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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 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.

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 31ˢᵗ of last year,but the remaining $3,500 was not paid until January of this year.When can Bob deduct the consulting fee?

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?

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.

Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses.How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. $500 in meals while attending a medical convention in New York. $300 for tuition for an investment seminar "How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is ________.

Manley operates a law practice on the accrual method and calendar year.At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000.At the end of the year,Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000.What is Manley's deduction for bad debt expense this year?

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 1ˢᵗ of this year through August 31ˢᵗ of next 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?

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 covers the next 12 months.What is Brad's deduction for the rent and insurance?

Mike operates a fishing outfitter as an accrual-method sole proprietorship.On March 1ˢᵗ of this year Mike received $15,000 for three outfitting trips.This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next three summers beginning this year.How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

The deduction for business interest expense is limited to the sum of (1)business interest income and (2)30 percent of the adjusted taxable income of the taxpayer for the taxable year.

Gabby operates a pizza delivery service.This year she paid delivery personnel $18,000 in salary.She carefully documented the business use of the auto (11,700 miles this year)and her $7,350 of vehicle expenses (for gas,oil,repairs,and auto lease payments).What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

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?

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

Werner is the president and CEO of Acme,Inc.and this year he took a prospective client to dinner.During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters.After dinner the CEO took the client to a football game and no business was discussed.The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game.What is the deductible amount of these expenses?

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.

According to the Internal Revenue Code §162,deductible trade or business expenses must be one of the following?

Bill operates a proprietorship using the cash method of accounting,and this year he received the following payments:   -$100 in cash from a customer for services rendered this year -a promise to pay $200 from a customer for services rendered this year -tickets to a football game worth $250 as payment for services performed last year -a check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?