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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 1

Multiple Choice

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Which of the following cannot be selected as a valid tax year end?

A) December 31ˢᵗ
B) January 31ˢᵗ
C) The last Friday of the last week of June.
D) December 15ᵗʰ
E) A tax year can end on any of these days

F) A) and C)
G) B) and D)

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Question 2

True/False

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Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

A) True
B) False

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Question 3

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

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

Which of the following expenses are completely deductible?

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?

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

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

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.

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?

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?

Shadow Services uses the accrual method and reports on a calendar year. This year Shadow agreed to a uniform cleaning contract with Odie Cleaning. Under the contract Odie bills Shadow for cleaning services as the services are provided. At year end Shadow paid Odie $2,350 for the services rendered during the year. In addition, Shadow paid Odie $700 for cleaning services expected in January of next year. What amount, if any, can Shadow deduct for the cleaning services this year?

Joe operates a plumbing business that uses the accrual method and reports on a calendar year. This year Joe signed a $50,000 binding contract with Brian. Under the contract Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour. This year Brian provided 200 hours of repair services and billed Joe for $5,000. At year end Joe had not paid Brian for the services. What amount, if any, can Joe deduct for the repair services this year?

Individual proprietors report their business income and deductions on:

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

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

Which of the following expenditures is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

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?

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.