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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 51

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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?

A) $4,000 for rent on his office, which covers the next 24 months.
B) $3,000 for a new watch for the mayor to keep "good relations" with city hall.
C) $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business.
D) $55 to collect an account receivable from a customer who has failed to pay for services rendered.
E) None of the choices are completely deductible.

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

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Question 52

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

A) An overall accounting method can only be adopted with the permission of the commissioner.
B) An overall accounting method is initially adopted on the first return filed for the business.
C) The cash method can only be adopted by individual taxpayers.
D) The accrual method can only be adopted by corporate taxpayers.
E) None of the choices are true.

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

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Question 53

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Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1^st of this year Mike received $15,000 for three outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next three summers, beginning this year. How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

Judy is a self-employed musician who performs for a variety of events. This year Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

According to the Internal Revenue Code §162, deductible trade or business expenses must be which one of the following?

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense this year?

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

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.

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?

Bill operates a proprietorship using the cash method of accounting, and this year he received the following payments: -$100 in cash from a customer for services rendered this year -a promise from a customer to pay $200 for services rendered this year -tickets to a football game worth $250 as payment for services performed last year -a check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

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 the 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 is a payment liability?

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?

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?

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

Individual proprietors report their business income and deductions on:

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

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.

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?