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Exam 1: Business Income,Deductions,and Accounting Methods

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Question 31

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

A) True
B) False

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Question 32

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Qualified production activity income for calculating the domestic production activities deduction is limited to taxable income for a business or modified AGI for an individual.

A) True
B) False

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Question 33

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Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year.On September 1^st of this year Anne paid $2,280 of interest on a loan.The interest accrues evenly over 19 months ($120 per month)from June 1^st of this year through December 31^st of next year.In addition,on September 1^st Anne also paid $2,700 for 18 months of professional liability insurance ($150 per month).What amount of interest and insurance can Anne deduct this year?

Which of the following business expense deductions is most likely to be unreasonable in amount?

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.

Which of the following is a payment liability?

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

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

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

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?

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

A business generally adopts a fiscal or calendar year by using that year end on the first tax return for the business.

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

Clyde operates a sole proprietorship using the cash method.This year Clyde made the following expenditures: $480 to U.S.Bank for 12 months of interest accruing on a business loan from September 1^st of this year through August 31^st of next year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this year?

Rock Island Corporation generated taxable income (before the domestic production activities deduction)of $10 million this year.The total income included $4,500,000 of qualified production activities income.The company paid $500,000 in W-2 wages to generate the qualified production activity income.What is Rock Island's domestic production activities deduction for the year?

Mike started a calendar year business on September 1^st of this year by paying 12 months' 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?

Individual proprietors report their business income and deductions on:

Kip started a wholesale store this year selling bulk peanut butter.In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000.In July Kip purchased three tubs for a total cost of $6,000.Finally,in November Kip bought two tubs for a total cost of $1,000.Kip sold six tubs by year end.What is Kip's ending inventory under the FIFO cost-flow method?

The all-events test for income determines the period in which income will be recognized 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?