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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 51

Multiple Choice

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

A) Spouse when the taxpayer is an individual.
B) A partner when the taxpayer is a partnership.
C) Brother when the taxpayer is an individual.
D) A minority shareholder when the taxpayer is a corporation.
E) All of these are related parties.

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

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Question 52

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David purchased a deli shop on February 1^st 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 31^st of this year as follows: What income should David report from his sole proprietorship?

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$27,500 = $112,000 − $84,500.
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Question 53

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

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?

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year, Todd made $420,000 of sales on account, and $64,000 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

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

Which of the following is a true statement about accounting for business activities?

Bill operates a proprietorship using the cash method of accounting, and this year he received the following:$130 in cash from a customer for services rendered this yeara promise from a customer to pay $194 for services rendered this yeartickets to a football game worth $235 as payment for services performed last yeara check for $176 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

A business can deduct the cost of uniforms supplied to employees.

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

Taffy Products uses the accrual method and reports on a calendar year. On July 1 ^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of its warehouse. The rent and insurance cover the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

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

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

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

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.

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

Joe operates a plumbing business that uses the accrual method and reports on a calendar year. This year, Joe signed a $50,000 binding contract with Brian. Under the contract, Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour. This year, Brian provided 200 hours of repair services and billed Joe for $5,000. At year-end, Joe had not paid Brian for the services. What amount, if any, can Joe deduct for the repair services this year?

Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1.6 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $1,100,000 for a one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

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