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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 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.

A) True
B) False

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Question 32

Multiple Choice

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Which of the following is a true statement?

A) Meals are never deductible as a business expense.
B) An employer can only deduct half of any meals provided to employees as compensation.
C) The cost of business meals must be reasonable.
D) A taxpayer can only deduct a meal for a client if business is discussed during the meal.
E) None of the choices are true.

F) C) and E)
G) B) and D)

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Question 33

Multiple Choice

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

In order to deduct a portion of the cost of a business meal, which of the following conditions must be met?

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?

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?

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

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

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

Murphy uses the accrual method and reports on a calendar year.This year Murphy signed a binding contract to provide consulting services to Kirby beginning next year.Murphy incurred $15,000 to train his staff for this particular project.In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract.What amount, if any, can Murphy deduct this year for the services expected to be rendered next 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 31^st of last year, but the remaining $3,500 was not paid until January of this year.When can Bob deduct the consulting fee?

Blackwell Manufacturing uses the accrual method and reports on a calendar year.This year a customer was injured when visiting the Blackwell factory.The customer sued the company for $500,000, and the case is still being litigated.However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim.What amount, if any, can Blackwell deduct for the expected claim settlement this year?

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 ________.

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

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?

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.

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.

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

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

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