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Exam 8: Business Income, Deductions, and Accounting Methods

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Question 41

Multiple Choice

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Which of the following is a true statement about travel that has both business and personal aspects?

A) Transportation costs are always fully deductible.
B) Meals are not deductible for this type of travel.
C) Only half of the cost of meals and transportation is deductible.
D) The cost of lodging, and incidental expenditures is limited to those incurred during the business portion of the travel.
E) None of these

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

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Question 42

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

A) True
B) False

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Question 43

Multiple Choice

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

Uniform capitalization of indirect inventory costs is required for most large taxpayers.

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job. The summer job usually pays about $17,000, but Bryon paid Fred $27,000 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary. She carefully documented the 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.

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

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?

David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows: $\begin{array}{llcc}& \underline{\text { Receipts }} & \underline{\text {Expenses } }\\ \text { February thru December } &\$112,000&\$84,500\\ \text { January } &10,400&6,200\\\end{array}$ What income should David report from his sole proprietorship?

Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: $\begin{array}{llcc} \text {Course Tuition } & \$2,500 \\ \text { Air Fare } &800\\ \text { Hotel (10 nights) } &1,200\\ \text {Rental car (10 days) } &900\\ \text { Meals (10 days) } &1,500\\\end{array}$ What amount of travel expenditures can Sam deduct?

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

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

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction

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.

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

Which of the following is a true statement?

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?