Exam 5: Introduction to Business Expenses

During the current year,Paul came down with a serious illness.Paul's uncle paid many of Paul's expenses during the period of rehabilitation.For tax purposes,how are Paul's mortgage interest and real estate property taxes handled? I.Paul can deduct both items. II.Paul's uncle can deduct both items. III.Neither Paul nor his uncle can deduct the expenses.

Henry owns a hardware store in Indianapolis.He has decided to expand his business interests and is considering opening a golf store in a neighboring town.He has incurred $12,000 of expenses investigating whether to open the new golf store.In July of the current year he finds the perfect location and opens the golf store on October 1.What amount of the investigation expenses can he deduct in the current year?

Claire and Harry own a house on Hilton Head Island.During the year,Claire and Harry rent the house for 30 days to friends from Texas for $2,000.Claire and Harry use the house a total of 60 days during the year.After making the appropriate allocation of expenses between personal and rental use,the following rental loss was determined: Rental income \ 2,000 Property taxes (250) Mortgage interest (950) Repairs and maintenance (200) Utilities (300) Depreciation (400) Rental loss \ (100) How should Claire and Harry report the rental income and expenses for the forthcoming year? I.Report the $100 loss for AGI. II.Only expenses up to the amount of $2,000 rental income may be deducted for the year. III.Include the $2,000 in gross income,but no deductions are allowed. IV.Nothing needs to be reported.

All of the following are a required test for the deduction of a business expense except?

Match the proper deduction method with the correct expenditures. -Fire and casualty insurance premium on business warehouse

Amy borrowed $25,000 for her business from a local bank two years ago.To increase her deductions for 2013,she pays December interest of $400 and prepays January and February interest totaling $800 on December 30,2013.The maturity date of the note is November 30,2014.How much of the interest that she paid in December is deductible in 2013? I.If she is a cash-basis taxpayer,Amy's interest deduction is $1,200. II.If she is an accrual-basis taxpayer,Amy's interest deduction is $400.

If a taxpayer owes interest,economic performance occurs I.with the passage of time. II.when the all-events test is met. III.when payments are made by the taxpayer.

Discuss whether the following persons are currently engaged in a trade or business: a.Katerina owns 35 home sites in and around Orlando. She bought these vacant lots several years ago in hopes to developing them into a subdivision. She begins to develop the lots in the current year. b.John spends 2 hours a day, 5 days a week, managing his investment portfolio. He watches the market and buys and sells securities when he thinks the market is right. His investment strategy is to realize dividends, interest, and long-term gains from holding the investments. c.Bill lives in Miami and works full-time betting on dog races. Although he intends to win large sums, he has failed to win the big one. He considers his betting activities his job and relies on his meager winnings to support his family. He is devoted to the races and has rarely missed a day betting in over 3 years.

Which of the following is an example of a business purpose as dominant motive? I.Darren is a full-time plumber and a part-time Amway salesman.He is taking his family to Disney World and plans to take his Amway products with him so that he may deduct most of his cost of the trip. II.Larry is a full-time plumber.He is taking his family with him to a convention in Orlando featuring the latest in plumbing products and techniques.He plans to deduct most of his cost of the trip.

An individual is indifferent whether an expense is deducted for or deducted from adjusted gross income.

James rents his vacation home for 30 days during the year and lives in it personally for 10 days.He receives rents of $4,000 and incurs the following expenses before allocation: Property taxes $2,000 Utilities 800 Depreciation 4,200 What is James' income or loss from the rental property?

An exception to the economic performance test allows the deduction of year-end accruals if I.The liability exists and the amount of the liability can be reasonably estimated. II.Economic performance occurs within the shorter of 8 1/2 months after the close of the tax year or a reasonable time after the close of the tax year

Marian,a schoolteacher in Duluth,Minnesota,owns a rental house in Scottsdale,Arizona.She travels to Arizona during spring break to inspect her property and discuss property improvements with the tenant and property manager.Marian's brother,Brian,lives in Scottsdale.She stays at his house during her week in Arizona and borrows his car to travel across town for her day of meetings.Her trip accomplishes several objectives: a visit with her brother,a trip away from Wisconsin's winter weather,and a review of her investment property.The expenses of traveling to Scottsdale I.have a dominant business purpose. II.are deductible as expenses for the production of income.

Karen owns a vacation home in Door County,Wisconsin.During the year,she rents it out for two weeks and uses it personally for three weeks.Her expenses directly related to renting out the property were utilities $300,and maid service $150.The portion of taxes allocable to the rental activity is $600 and revenue from the rental is $1,000.Karen will

Discuss whether the following expenditures meet the ordinary,necessary,and reasonable requirements for deductibility. a.Mortimer owns a shoe store. Every August Mortimer has a "Back-to-School" sale. To promote that event Mortimer spends $2,000 on newspaper and radio advertising. Generally, this event generates about $85,000 in sales. These sales revenues are about twice the level of sales in other months. b.Wilma bought a small manufacturing business that had been declared bankrupt. To retain the current sales force, she pays some of the obligations owed to these people by the former owners. Wilma has no legal obligation to pay these debts. c.Ned owns a large sporting goods store. Nick's 17-year-old son, Tony, works in the store when time permits. Nick pays Tony $10 per hour because he has worked in the store several years. Other high school age individuals also work at the store and perform functions requiring less experience than Tony. They are paid $8 per hour. d.Art is a self-employed CPA. Last month he attended an AICPA Continuing Education course that cost him $750. In addition to the course registration fee, Art incurred $800 in travel expenses to attend the course. e.Elvira is a stockholder in over 100 different corporations. However, she does not own more than 10 shares of stock in any one company. She enjoys attending annual stockholder meetings and often gives her "two cents worth" about issues affecting the companies' operations. In the past year Elvira spent $7,540 to attend the stockholder meetings to help protect her investments.

Match the proper deduction method with the correct expenditures. -Betterment

If someone provides a taxpayer with either property or services,economic performance occurs when

Richard,a cash basis taxpayer,is an 80% owner and president of WLFI TV.WLFI TV is an S corporation and uses the accrual method of accounting.On December 1,2013,WLFI TV accrues a bonus of $50,000 to Richard.The bonus is payable on January 31,2014.In what year does Richard report the income and WLFI TV take the deduction? Richard WLFI TV a. 2014 2013 b. 2014 2014 c. 2013 2013 d. 2013 2014

Match each statement with the correct term below. -Non-deductible expense

Match the proper deduction method with the correct expenditures. -Federal lobbying expenditures