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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 21

Multiple Choice

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

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Question 22

Multiple Choice

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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 Internal Revenue Code disallowed all insurance premiums deductions.

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

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Question 23

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Individual proprietors report their business income and deductions on:

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?

Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary. She carefully documented the 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.

Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last year?

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

Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel-related expenditures may Danny deduct as business expenses?

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?

Which of the following is a true statement?

Sandy Bottoms Corporation generated taxable income (before the domestic manufacturing deduction) of $3 million this year. The total income included $2,350,000 of qualified production activities income. The company paid $460,000 in W-2 wages to generate the qualified production activity income. What is Sandy Bottom's domestic manufacturing deduction for the year?

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.

Which of the following is a true statement?

A short tax year can end on any day of any month other than December.

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

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?

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

The domestic production activities deduction is a deduction for the incremental cost of manufacturing tangible assets in the United States.

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 the Todd's §481 adjustment for this year?

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.