Chapter 1 Multiple Choice Questions – Flashcards

According to the IRC Code 162, deductible trade or 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

Which of the following 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

The IRS would most likely apply the arm's long 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

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. All of these are likely to be unreasonable in amount E. None of these is likely to be unreasonable in amount

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 are true E. None of these is true

Which of the following expenditures is most likely to be deductible for a construction business? A. A fine for zoning violation B. A tax underpayment penalty C. An "under the table" payment to a government rep 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.

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 expense are not deductible unless specifically allows in the IRC. E. The rule was grandfathered from a time when the IRC disallowed all insurance premiums deductions.

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 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 $900 tickets to the opera with a client following a business meeting

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.

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.

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 meal must occur on the taxpayer's business premises. D. None of these is a condition for a deduction. E. All of these are conditions for a deduction

Which of the following is likely to be a fully deductible business expense? A. Salaries in excess of the industry average paid to attract talented employees. B. The cost of employee uniforms that can be adapted to ordinary personal wear. C. A speeding fine paid by a trucker who was delivering a rush order. D. The cost of a three-year subscription to a business publication. E. None of these is likely to be deductible.

After a business meeting with a prospective client Holly took the client to dinner and the theatre. Holly paid $290 for the meal 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. $415 C. $270 D. None unless Holly discussed business with the client during the meal and the entertainment. E. None- the meals and entertainment are not deductible except during travel

This year Clark leased a car to drive between his office and various work sites. Blake 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?

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.

Ed is a self-employed heart surgeon who has incurred the following reasonable expenses. How much can Ed deduct? $1,000 in airfair 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 successfull negotiation of a surgical contract earlier in the day.

Ronald is 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 realtions" with city hall. C. $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business D. $55 to colelct and account receivable from a customer who has failed to pay for services rendered E. None of these is completely deductible.

George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic production acitivities 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 production activities deduction will George be eligible to claim this year?`

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction

Riley operates a plumbing business and this year the 3-year old van he used in the business was destroyed in a traffic accident. The van was orginiall 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 the accident, insurance only paid Riley $1,200 for the loss. What is the amount of RIley's casualty loss deduction?

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?

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.

Clyde operates a sole proprietorship using the cash method. This year Clyde made the following expenditures: $480 to U.S. 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

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?

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

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received 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?

Which of the following types of transactions may not typically be accounted for using the cash method? A. sales of inventory B. services C. Purchases of machinery D. payments of debt E. Sales of securities by an investor

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.

Mike started a calendar year business of 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?

Which of the following is a payment liability? A. Tort claimis B. Refunds C. Insurance premiums D. Real estate taxes E. All of these

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 these are true.

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 $500,00 for advertising time during a professional golf tournament which will occur once in APril of next year. What amount of these payments, if any, can Ajax deduct 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 has 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?

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 is NOT considered a related party for the purpose of limitation on accruals to related parties? A. Spouse when the taxpayer is an individual B. A partner when the taxpayer is a partnership C. Brother when the taxpayer is an individual D. A minority shareholder when the taxper is a corporation E. All of these are related parties

Which of the following is a true statement about impermissible accounting methods? A. An impermissible method is adopted by using the method to report results from two consecutive years. B. An impermissible method may never be used by a taxpayer. C. Cash method accounting is an impermissible method for partnerships and Subchapter S electing corporations. D. There is no accounting method that is impermissible E. None of these is true.

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 tehy ear. What is the Todd's 481 adjustment for this year?

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 Commisioner C. Many requests require payment of a fee and a good business purpose for the chance D. Form 3315 is required to be filed with a request for change in am E. all of these are true