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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 71

Multiple Choice

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For purposes of the business interest limitation, adjusted taxable income is defined as taxable income allocable to the business computed without regard to which of the following:

A) interest income, depreciation, amortization, or depletion; interest expense; and net operating loss deductions.
B) 30 percent of revenue after deducting depreciation and interest expense.
C) Debt invested in the business.
D) interest income after deducting 30 percent of all deductible expenses.
E) None of the choices are correct.

F) A) and E)
G) A) and B)

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Question 72

Multiple Choice

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Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below) . What amount can Shelley deduct?

A) $3,026
B) $2,908
C) $1,946, if Shelley itemizes the deductions
D) All of these expenses are deductible but only if Shelley attends a conference in Texas.
E) None of the expenses are deductible because Shelley visited her friend.

F) A) and E)
G) B) and E)

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Question 73

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

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.

Which of the following is a true statement about a request for a change in accounting method?

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?

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 the 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.

Jones operates an upscale restaurant and he pays experienced cooks $41,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $44,800 per year. Which of the following is a true statement about this transaction?