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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 51

True/False

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Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

A) True
B) False

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Question 52

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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 the choices are correct.

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

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Question 53

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

Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

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

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?

Which of the following types of transactions may not typically be accounted for using the cash method for small proprietorships?

Smith operates a roof repair business. This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business: The education expense was for a two-week, night time course in business management. Smith believes the expenditure should qualify as an ordinary and necessary business expense. What net income should Smith report from his business? Smith is on the cash method and calendar year.

Alvin is a self-employed sound technician who reports on the cash method and calendar year. Alvin has a shop in Austin, Texas, but he spends much of his time away from his shop traveling to and from various concerts around the country. Alvin leases a truck to move his equipment around the country and this year he spent $12,000 in lease payments and paid $18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips. What amount of these expenses may Alvin deduct as business expenses?

The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss which is not properly allocable to a trade or business.

Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

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

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: What amount of travel expenditures can Sam deduct?

Which of the following is a true statement about impermissible accounting methods?

Which of the following is a payment liability?

Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time at year-end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year-end but prior to filing his tax return. Which of the following is a true statement?

Which of the following is a true statement about the limitation on business interest deductions?

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 1^st of year 1 through May 31^st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?