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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 51

True/False

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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 52

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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?

A) $48,000 for the rent and $18,000 for the insurance.
B) $24,000 for the rent and $18,000 for the insurance.
C) $24,000 for the rent and $9,000 for the insurance.
D) $48,000 for the rent and $9,000 for the insurance.
E) None of the choices are true.

F) None of the above
G) C) and D)

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Question 53

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Sole proprietorships must use the same tax year as the proprietor of the business.

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

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.

Ranger Athletic Equipment uses the accrual method and reports on a calendar year.Ranger provides two-year warranties on all sales of equipment.This year Ranger estimated warranty expense for book purposes,and he accrued $1 million of warranty expenses.However,during the year Ranger only spent $400,000 repairing equipment under the warranty.What can Ranger deduct for warranty expense on the tax return for this year?

All taxpayers must account for taxable income using a calendar year.

Marilyn operates a day care center as a cash-method sole proprietorship.On August 1ˢᵗ of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months.How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

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?

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.

John is a self-employed computer consultant who lives and works in Dallas.John paid for the following activities in conjunction with his business.Which is not deductible in any amount? 1.Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

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

Which of the following is a true statement?

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?

Todd operates a business using the cash basis of accounting.At the end of last year,Todd was granted permission to switch his sales on account to the accrual method.Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year.What is Todd's §481 adjustment for this year?

Which of the following expenses are completely deductible?

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?

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

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