Exam 5: Introduction to Business Expenses

Indicate which of the following statements is/are correct: I.An accrual basis taxpayer who gives a creditor his note payable in payment of a claim may deduct the related expense when the note is given. II.When a cash basis taxpayer uses a credit card to pay for an expense it can deduct the expense when the expense is charged to the credit card..

Andy lives in New York and rents his house for two weeks during the U.S.Open Tennis tournament for $3,500.He must include the rent in his income.

Using the tests for deductibility discussed in Chapter 5,explain why the following expenses may not be fully deductible in the current year. a.Antonio is the owner of a restaurant. His business has been growing, and Antonio determines that he needed to add more seating capacity. He builds a patio garden section onto the back of the restaurant at a cost of $70,000. b.Tina owns a construction company. Because she is behind schedule on a project, she pays a city building inspector $500 to get him to come out and do his inspection a week before he had scheduled the inspection. c.Claude is a graduate of State University and an avid supporter of the school's athletic program. During the summer he employed State's star running back in his pool cleaning business. He paid the football player $15 an hour, although other employees doing similar work are only paid $10 per hour. d.Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city this year, she spent $20,000 advertising the new store. Even though this is much more than she typically spends on advertising, she felt that it was reasonable because the new coffeehouse has the potential to be a very profitable venture for many years.

Match each statement with the correct term below. -Capital expenditure

Which of the following expenditures or losses incurred in the context of a trade or business activity is deductible at the time it is incurred?

Tom and RoseMary own a cabin near Stowe,Vermont.During the current year the cabin is rented for 31 days for $1,800.Tom and RoseMary used the cabin a total of 12 days during the year.After making the appropriate allocation of expenses between personal and rental use,the following rental loss was determined: Rental income \ 1700 Property taxes (150) Mortgage interest (950) Repairs and maintenance (400) Utilities (300) Depreciation (200) Rental loss \ (300) How should Tom and RoseMary report the rental income and expenses for the current year?

Elise is a self-employed business consultant who operates her business out of an office in her home.The home office passes the qualifying tests for deducting office in the home expenses.For the current tax year,Elise earns $90,000 from her business activities.She incurs $82,000 in supplies,travel expenses,wage expense,etc.Elise's mortgage interest and real estate taxes allocable to the home office space were determined to be $9,000.Also,other expenses including insurance,repairs and maintenance,utilities,and depreciation allocable to the home office space total $11,000.How much of the other expenses (insurance,repairs,etc.)can Elise deduct?

Match each statement with the correct term below. -Mixed-use asset

Bruce operates an illegal drug business.Which of the following is deductible?

Wanda owns and operates a restaurant on the north side of Cleveland.She is considering opening a second restaurant on the south side of town and incurs $13,600 of investigation expenses.In July of the current year,Wanda decides not to open a second restaurant.How much of the investigation expenses can Wanda deduct in the current year?

Which of the following is/are currently deductible trade or business expenses? I.Personal property taxes on a hot air balloon operated as a hobby. II.Interest paid on the mortgage note on a business warehouse.

Which of the following payments are deductible? I.Wilcox pays $1,000 to run an add in the program of the state Independent Party convention II.Wilcox is in the construction business.In January,he sends his chief financial officer to Washington,D.C.,to monitor current legislation affecting the real estate industry.Expenses totaled $2,100. III.In March,Wilcox personally travels to Washington,D.C.,to testify before the banking subcommittee on the effects of proposed legislation on the construction industry.Expenses totaled $2,300.

Generally income tax accounting methods are designed to result in I.a tax based on the amount of cash available in the current period to pay taxes. II.a denial of a current deduction for costs that will not have to be paid in the near future.

Jim operates a business out of his home.One room in his home is used for business and qualifies as a home office.Which of the following allocable expenditures can Jim use in computing his home office expense deduction? I.Jim pays his housekeeper $25 a week to sweep,dust and straighten-up his office. II.Jim's fire and casualty insurance premiums on his home are $800.

William,a single taxpayer,has $3,500 state income tax withheld from his paychecks in 2012.When he filed his 2012 state income tax return on April 15,2013,he calculated and received a $600 refund.The $600 refund was received on May 27,2013.What are the federal tax effects of the state income tax events of 2012 and 2013? I.If his itemized deductions total $6,000 in 2012,William includes $300 in gross income for 2013 II.If he did not itemize his deductions in 2012,none of the refund is included in 2013 gross income.

An ordinary expense I.is an expense commonly incurred in an income-producing activity. II.is an expenditure that provides future benefits to an income-producing activity.

Charlotte traveled to Annapolis to attend a three-day business conference.After her meetings concluded,she stays 2 additional days sightseeing.Charlotte's airfare is $400 and pays $110 per night for lodging,$60 a day for meals,and $20 a day for incidentals.How much of Charlotte's costs can be deducted as a business expense?

Match the proper deduction method with the correct expenditures. -Illegal gambling operation expenses

Discuss whether the following persons are currently engaged in a trade or business: a.Darlene has expenses related to managing her portfolio of securities. The trading of the securities generates most of her annual income. She generally does not hold securities long-term. She buys and sells continuously. She has no other job. b.Mark incurs expenses related to investing in stocks and bonds. Mark is a Sociology professor at Indiana University but spends 10-15 hours per week on his investments. Approximately 70% of Mark's annual income come from his investments as dividends and interest. c.Paul leases real estate to Floyd's Barber Shop for a parking lot. The only expense he incurs is legal expense regarding the lease, which he renegotiates annually. d.Mandy owns several rental apartments. She arranges for repairs and maintenance, pays for the expenses related to the properties, and handles all leasing activities.

The Wilson Corporation incurs the following expenses.Explain whether the following expenses should be capitalized or deducted in the current period. a.Paid $2,500 to blacktop a gravel parking lot. b.Paid $1,900 for new tires on the truck. c.Paid $3,000 for a new fire and security alarm system for the factory. d.Paid $6,250 to paint the interior and exterior of the office and factory building that it just acquired. e.Paid $1,200 for a new compressor for the factory's central air conditioning system.