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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 31

True/False

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The all-events test for income determines the period in which income will be recognized for tax purposes.

A) True
B) False

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Question 32

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

A) Spouse when the taxpayer is an individual.
B) A partner when the taxpayer is a partnership.
C) Brother when the taxpayer is an individual.
D) A minority shareholder when the taxpayer is a corporation.
E) All of these are related parties.

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

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Question 33

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

The deduction for business interest expense is limited in 2020 to the sum of (1)business interest income and (2)40 percent of the adjusted taxable income of the taxpayer for the taxable year.

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?

Ralph borrowed $4 million and used the proceeds in his Internet business. The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $26 million or less for the prior three taxable years.

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

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 $23,000 and claimed depreciation of $12,600 up to the fire. Otto was charged $4,100 for repairs to the oven but the insurance company paid Otto $1,650 for the damage. What is Otto's casualty loss deduction?

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 _____.

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?

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?

Beth operates a plumbing firm. In August of last year, she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers)of $3 million this year. Taxable income was computed on $50 million of revenues and included $145,000 of interest income. The company paid $454,750 in interest expense. What is Rock Island's maximum business interest deduction for the year?

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?

Mike started a calendar-year business on September 1^st of this year by paying 12 months of rent on his shop at $650 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident. The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost. What is the amount of Don's casualty loss deduction?

Ed is a self-employed heart surgeon wholives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct? $1,340 in airfare to repair investment rental property in Colorado. $650 in meals while attending a medical convention in New York. $375 for tuition for an investment seminar, "How to pick stocks." $142 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 _____.

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

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

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.