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b

In order to deduct a portion of the cost of a business meal, which of the following conditions must be met?

a) A client (not a supplier or vendor) must be present at the meal.
b) The taxpayer or an employee must be present at the meal.
c) The total cost must be extravagant.
d) The meal must occur on the taxpayer's business premises.
e) None of these is a condition for a deduction.

true

The domestic manufacturing deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.
• True
• False

false

Illegal bribes and kickbacks are not deductible as business expenses, but this prohibition does not include fines incurred in the ordinary course of business.
• True
• False

c

Mike started a calendar year business on September 1st of this year by paying 12 months' rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?
a) $12,000 under the cash method and $12,000 under the accrual method
b)$4,000 under the cash method and $12,000 under the accrual method
c)$12,000 under the cash method and $4,000 under the accrual method
d)$4,000 under the cash method and $4,000 under the accrual method
e)$4,000 under the cash method and zero under the accrual method

b

Colbert operates a catering service on the accrual method. In November of year 1, Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?
a) $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.
b) $500 is recognized in year 1 and $8,500 in year 2.
c) $9,000 is recognized in year 3.
d) $2,500 is recognized in year 1 and $6,500 in year 2.
e) $9,000 is recognized in year 1.

True

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary".
• True
• False

False

The domestic manufacturing deduction is a deduction for the incremental cost of manufacturing tangible assets in the United States.
• True
• False

False

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

e

Joe is a self employed electrician who operates his business on the accrual method. This year, Joe purchased a shop for his business and 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. 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 these are true.

d

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 these are deductible by Dick.

$6,300

George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic manufacturing deduction). Included in income was $70,000 of qualified production activities income. George paid $60,000 of wages to employees engaged in domestic manufacturing. What domestic manufacturing deduction will George be eligible to claim this year?

$5,400
$6,300
$7,200
$15,300
$22,500

a

This year, Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments). What amount of these expenses may Clark deduct as business expenses?

a) $7,200.
b) Clark cannot deduct these costs but he must use the mileage method to determine any deduction.
c) $4,500.
d) $2,700.
e) Clark is not entitled to any deduction if he used the car for any personal trips.

$450

Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures?

$1,000 dinner with a film producer where no business was discussed
$500 lunch with sister Nicky where no business was discussed
$700 business dinner with a client but Paris forgot to keep any records (oops!)
$900 tickets to the opera with a client following a business meeting

$450
$900
$1,100
$1,200
$800

b

Beth operates a plumbing firm. In August of last year, she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

a) In August of last year
b) In December of last year
c) In January of this year
d) In March of this year
e) In April of this year

True

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

True
False

e

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 required to be filed with a request for change in accounting method.
e) All of these are true.

False

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

True
False

c

Which of the following is a true statement about the domestic manufacturing deduction?
a) This deduction is determined by the amount of goods manufactured in the United States for export abroad.
b) The deduction is calculated as a percentage of the cost of goods manufactured in the United States.
c) This deduction represents a subsidy to taxpayers who manufacture or construct goods in the United States.
d) The domestic manufacturing deduction is not affected by the cost of labor.
e) All of these are true.

a

Qualified production activities income is defined as follows for purposes of the domestic manufacturing deduction.
a) net income from selling or leasing property the taxpayer manufactured in the United States.
b) revenue from selling or leasing property the taxpayer manufactured in the United States.
c) revenue from selling or leasing property the taxpayer manufactured in the United States but the revenue was less that 50 percent of qualifying wages used in the production.
d) 6 percent of revenue from selling or leasing property the taxpayer manufactured in the United States.
e) None of these.

True

Uniform capitalization of indirect inventory costs is required for most large taxpayers.
True
False

e

Which of the following expenses are completely deductible?
a) $1,000 spent on compensating your brother for a personal expense.
b) $50 spent on meals while traveling on business.
c) $2,000 spent by the employer on reimbursing an employee for entertainment.
d) All of these expenses are fully deductible.
e) None of these expenses can be deducted in full.

True

Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.
True
False

d

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.

True

A fiscal tax year can end on the last day of any month other than December.
True
False

True

The all-events test for income determines the period in which income will be recognized for tax purposes.
True
False

b

According to the Internal Revenue Code §162, deductible business expenses must be one of the following?
a) incurred for the production of investment income
b) ordinary and necessary
c) minimized
d) appropriate and measurable
e) personal and justifiable

True

The domestic manufacturing deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.
True
False

True

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.
True
False

False

The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.
True
False

e

Which of the following business expense deductions is most likely to be unreasonable in amount?
a) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees.
b) Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations.
c) Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client.
d) None of these is likely to be unreasonable in amount.
e) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees, amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations, and cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client are all likely to be considered unreasonable in amount.

True

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary".
True
False

True

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

c

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 $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?
a) $12,000 because rebates are payment liabilities.
b) $19,500 because Big Homes is an accrual method taxpayer.
c) $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing their tax return for this year.
d) $12,000 because the $7,500 liability is not fixed and determinable.
e) Big Homes is not entitled to a deduction because rebates are against public policy.

False

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.
True
False

True

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.
True
False

c

Which of the following is a true statement?
a) Meals are never deductible as a business expense.
b) An employer can only deduct half of any meals provided to employees.
c) The cost of business meals must be reasonable.
d) A taxpayer can only deduct a meal for a client if business is discussed during the meal.
e) None of these is true.

b

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 these is true.

True

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

d

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?
a) Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.
b) Jim must defer the recognition of the income until the income is earned.
c) Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.
d) Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.
e) Jim can never defer the recognition of the prepayments of income.

e

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 to pay $200 from a customer 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?
a) $100
b) $300
c) $350
d) $270
e) $520

True

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

c

Individual proprietors report their business income and deductions on:
a) Form 1065
b) Form 1120S
c) Schedule C
d) Schedule A
e) Form 1041

b

Shelley is employed in Texas and recently attended a two-day business conference in New Jersey. Shelley spent the entire time at the conference and documented her expenditures (described below). What amount can Shelley deduct as an employee business expense?

Airfare to NJ $2,000
Meals 220
Lodging in NJ 450
Rental Car 180

a) $2,850.
b) $2,740.
c) $1,850 if Shelley's AGI is $50,000.
d) All of these are deductible if Shelley is reimbursed under an accountable plan.
e) None of the expenses are deductible - only employers can deduct travel expenses.

d

The IRS would most likely apply the arm's length transaction test to determine which of the following?
a) whether an expenditure is related to a business activity
b) whether an expenditure will be likely to produce income
c) timeliness of an expenditure
d) reasonableness of an expenditure
e) All of these

d

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 that 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 these is completely deductible.

True

Qualified production activity income for calculating the domestic manufacturing deduction is limited to taxable income for a business or modified AGI for an individual.
True
False

a

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?
a) The insurance deduction 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 IRC disallowed all insurance premiums deductions.

True

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

a

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?
a) selling expenditures.
b) cost of manufacturing labor.
c) compensation of managers who supervise production.
d) cost of raw materials.
e) All of these are subject to capitalization under the UNICAP rules.

a

Clyde operates a sole proprietorship using the cash method. This year, Clyde made the following expenditures:

$480 to US Bank for 12 months of interest accruing on a business loan from September 1st of this year through August 31st of next year
$600 for 12 months of property insurance beginning on July 1 of this year.

What is the maximum amount Clyde can deduct this year?
a) $760
b) $600
c) $480
d) $160
e) $360

d

When does the all-events test under the accrual method require the recognition of income from the sale of goods?
a) when the title of the goods passes to the buyer.
b) when the business receives payment.
c) when payment is due from the buyer.
d) the earliest of the above three dates.
e) None of these.

b

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 these is true.

a

Ed is a self-employed heart surgeon who has incurred the following reasonable expenses.

$1,000 in air fare to repair investment rental property in Colorado.
$500 in meals while attending a medical convention in New York.
$300 for tuition for an investment seminar "How to pick stocks."
$100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day.

How much can Ed deduct?
a) $1,300 "for AGI."
b) $1,300 "for AGI" and $300 "from AGI."
c) $480 "for AGI."
d) $80 "for AGI" and $1,300 "from AGI."
e) None of these.

a

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 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 $500,000 for advertising time during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?
a) $1 million.
b) $500,000.
c) $1.5 million.
d) $1.5 million only if the professional golf tournament is played before April 15.
e) No deduction can be claimed this year.

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