Exam 5: Introduction to Business Expenses

In which of the following circumstances would a cash basis taxpayer be required to account for an item of income or deduction under the accrual method of accounting?

Harold,a cash basis taxpayer,borrows $65,000 for his business on a 2-year note from First City Bank on December 1,2013.To close on the loan agreement,Harold is required to prepay interest of $4,800 on December 1.How much interest can Harold deduct in 2013?

Match each statement with the correct term below. -Vacation home expense

Which of the following individuals is involved in a trade or business? I.Lil owns a farm near Lafayette,Indiana.She leases the property to Cal,who operates the farm for himself.Lil receives 10% of Cal's net income as part of the lease agreement but has no responsibilities for the farming operation. II.Lorraine owns a warehouse located in Brooklyn NY.She paid $250,000 for the real estate several years ago.It is now appraised at over $1,000,000,but she still uses the building only to store her painting collection.

Larry is a history teacher.He subscribes to several periodicals about teaching history and judging history fairs.This year Larry spends $285 on subscriptions to various periodicals.Discuss the deductibility of the expenditures for tax purposes.

Sarah extensively buys and sells securities .The IRS has determined upon examination that she is in a trade or business concerning the securities' transactions and therefore,Sarah is

Which of the following production of income expenses would be deductible: I.Interest expense on loan to acquire U.S.Treasury notes. II.Interest expense on loan to acquire IBM Corporate bonds.

Devery,Inc.sells high tech machine parts that are fully warranted against defects.Based on prior years experience they can expect to incur $20,000 of warranty expense on current sales.They are on the accrual basis,and the warranty expense is based on a reasonable estimate,so Devery can deduct the $20,000.

Christy purchases $1,000-worth of supplies from a local vendor.The supplies are delivered on March 29,2013.The supplies are fully used up by year end.Because of unusual circumstances,a bill for the supplies arrives from the vendor on January 10,2014,and is promptly paid.When can Christy deduct the expenses? I.In 2013,if she is an accrual basis taxpayer. II.In 2014,if she is a cash basis taxpayer.

Three requirements must be met in order to deduct a trade or business expense.Also,deductible trade or business expenses may not be which of the following: I.a capital expenditure. II.reasonable in amount. III.a payment that frustrates public policy. IV.an expense related to tax-exempt income.

Which of the following factors are used to aid in determining whether an activity that earns income is profit motivated and should be treated as a business or is subject to the hobby loss rules? I.The amounts of occasional profits,if any. II.Taxpayer's success in similar activities.

Match the proper deduction method with the correct expenditures. -Hobby loss

In the current year,Paul acquires a car for $16,000.He uses the car in his advertising business and for personal purposes.His records indicate the car is used 60% for business and that the total operating expenses,including depreciation,are $4,700.Paul expects to use the car for 5 years in his business.What amount can Paul deduct as the operating costs of the car?

Mario paints landscape portraits,and he treats the activity as a hobby.During the current year,Mario incurred the following expenses while earning $2,500 from sales of paintings: Paints and supplies \ 2,200 Utilities expenses for his studio 1,000 Advertising 300 Insurance on his studio and equipment 700 Mario uses the standard deduction and never itemizes his deductions.How should Mario report all of the items related to his hobby on his tax return?

Kim owns and operates a restaurant on the north side of Indianapolis.She is considering opening a day care center on the south side of town and incurs $10,400 of investigation expenses.In July of the current year,Kim opens the day care center.How much of the investigation expenses can Kim deduct in the current year?

For its financial accounting records Addison Company uses the allowance method to account for bad debts and estimates the balance in the "Allowance for Bad Debts" account using the aging method.For tax purposes,the allowance method cannot be used.The rationale for not allowing this method is

Match each statement with the correct term below. -Production-of-income expense

Which of the following expenses is/are deductible? I.Transportation and lodging expenses of $3,000 incurred to monitor state legislation that may affect the taxpayer's business. II.Lobby expenses of $300 during the year to influence local town legislators to support pro-business legislation.

In order for a taxpayer to reduce taxable income with a deduction,the tax law must allow it,and it must meet all statutory requirements.

Virginia,a practicing CPA,receives $11,000 from the sale of rare orchids that she grows.Her expenses of operating this hobby activity follow: Froperty taxes on the structures \ 4,500 Seeds, fertilizer, and bug sprays. 8,000 Depreciation on the structures 5,000 How much of the expenses that Virginia incurs can be deducted as hobby expenses?