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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 21

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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?

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$1,440 = $840 interest ($120 × 7 months ...

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Question 22

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

A) Some requests are automatically granted.
B) Most requests require the permission of the Commissioner.
C) Many requests require payment of a fee and a good business purpose for the change.
D) Form 3115 is typically required to be filed with a request for change in accounting method.
E) All of the choices are true.

F) A) and D)
G) D) and E)

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Question 23

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Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.

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

Shelley is employed in Texas and recently attended a two-day business conference at the request of her employer. Shelley spent the entire time at the conference and documented her expenditures (described below) . What amount can Shelley deduct if she is not reimbursed by her employer?

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?

Sole proprietorships must use the same tax year as the proprietor of the business.

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

John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which is not deductible in any amount? 1. Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

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 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.

Which of the following expenses are completely deductible?

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

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

Adjusted taxable income is defined as follows for purposes of the business interest limitation:

Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $290 for the meal and $250 for the theatre tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

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?

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1^st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

Which of the following is a true statement?