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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 1

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

A) A deduction for the insurance premium would offset taxable income without the potential for the proceeds generating taxable income.
B) The federal government does not want to subsidize insurance companies.
C) It is impractical to trace insurance premiums to the receipt of proceeds.
D) Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code.
E) This rule was grandfathered from a time when the Internal Revenue Code disallowed all insurance premiums deductions.

F) A) and B)
G) C) and D)

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Question 2

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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?

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$5,000.The all-events test is satisfied ...

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Question 3

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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?

Murphy uses the accrual method and reports on a calendar year. This year, Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

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

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 that is not properly allocable to a trade or business.

George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million. Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

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.

Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $24,500 and the adjusted basis was $1,750 at the time of the accident. The taxi was repaired at a cost of $2,625 and insurance reimbursed Don $715 of this cost. What is the amount of Don's casualty loss deduction?

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

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

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 $427,000 of sales on account, and $66,800 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

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?

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $12,300 in rebates and was liable for an additional $7,650 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

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?

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below) . What amount can Shelley deduct?

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

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers)of $3 million this year. Taxable income included $75,000,000 of revenue and $350,000 of interest income. What is Sandy Bottoms's domestic maximum interest expense deduction for the year?

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?