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Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job. The summer job usually pays about $17,000, but Bryon paid Fred $27,000 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

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$17,000
Only $17,000 is deduct...

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Brad operates a storage business on the accrual method. On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance covers the next 12 months. What is Brad's deduction for the rent and insurance?


A) $48,000 for the rent and $18,000 for the insurance.
B) $24,000 for the rent and $18,000 for the insurance.
C) $24,000 for the rent and $9,000 for the insurance.
D) $48,000 for the rent and $9,000 for the insurance.
E) None of the choices are True.

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

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Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary. She carefully documented the business use of the auto (11,700 miles this year) and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

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$25,350
$25,350 = $18,000 salary plus $7...

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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) D) and E)
G) C) and E)

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Which of the following expenditures is most likely to be deductible for a construction business?


A) A fine for a zoning violation.
B) A tax underpayment penalty.
C) An "under the table" payment to a government representative to obtain a better price for raw materials.
D) A payment to a foreign official to expedite an application for a business permit.
E) An arm's length payment to a related party for emergency repairs of a sewage line.

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

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

A) True
B) False

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Werner is the president and CEO of Acme, Inc. and this year he took a prospective client to dinner. During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters. After dinner the CEO took the client to a football game and no business was discussed. The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

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$610 = 50% × ($1,220...

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


A) December 31ˢᵗ
B) January 31ˢᵗ
C) The last Friday of the last week of June.
D) December 15ᵗʰ
E) A tax year can end on any of these days

F) B) and E)
G) C) and D)

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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.

A) True
B) False

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


A) Health insurance with benefits payable to the employee.
B) Whole life insurance with benefits payable to the employee's dependents.
C) Group term life insurance with benefits payable to the employee's dependents.
D) Key man life insurance with benefits payable to Dick.
E) All of the choices are deductible by Dick.

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

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


A) Cost of fertilizer
B) Accounting fees
C) Cost of a greenhouse
D) Cost of uniforms for employees
E) A cash settlement for trade name infringement

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

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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?


A) $1,300.
B) $2,500.
C) $1,800.
D) $2,000.
E) Don is not eligible for a casualty loss deduction.

F) D) and E)
G) C) and E)

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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? 

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$25,000 = (30/36 × [$18,000 + ...

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Which of the following is a True statement?


A) Interest expense is not deductible if the loan is used to purchase municipal bonds.
B) Insurance premiums are not deductible if paid for "key man" life insurance.
C) One half of the cost of business meals is not deductible.
D) All of these choices are True.
E) None of the choices are True.

F) A) and D)
G) All of the above

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Which of the following is a True statement?


A) Meals, lodging, and incidental expenditures are only deductible if the taxpayer is away from home overnight while traveling.
B) Meals are deductible for an employee who is forced to work during the lunch hour.
C) When a taxpayer travels solely for business purposes, only half of the costs of travel are deductible.
D) If travel has both business and personal aspects, the cost of transportation is always deductible but the deductibility of lodging depends upon whether business is conducted that day.
E) None of the choices are True.

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

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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?


A) If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year.
B) The taxes are a payment liability.
C) The taxes would not be deductible if Joe's business was on the cash method.
D) Unless Joe makes an election, the taxes are not deductible this year.
E) All of the choices are True.

F) None of the above
G) B) and D)

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Ralph borrowed $4 million and used the proceeds in his internet business. The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $25 million or less for the prior three taxable years.

A) True
B) False

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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?


A) $540
B) $270
C) $145
D) $125
E) None - the meals and entertainment are not deductible except during travel.

F) C) and D)
G) B) and E)

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


A) Interest disallowed by this limitation is carried back three years and then forward five years.
B) The limitation is calculated as a percentage of the taxpayer's total taxable income.
C) This limitation is not imposed on businesses with average annual gross receipts of $25 million or less for the prior three taxable years.
D) All of the choices are False.
E) All of the choices are True.

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

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