Exam 5: Introduction to Business Expenses

Marlene is a single taxpayer with an adjusted gross income of $140,000.In addition to her personal residence,Marlene owns a ski cabin in Vail.She uses the cabin for 40 days during the current year and rents it out to unrelated parties for 80 days,receiving rent of $10,000.Marlene's costs before any allocation related to the cabin are as follows: Mortgage interest and property taxes \ 9,000 Utilities, maintenance, and repairs 4,500 Depreciation 6,000 Based on the above information,what is her allowable depreciation deduction?

Match each statement with the correct term below. -Lobbying expense

Match the proper deduction method with the correct expenditures. -Organization costs

Sadie is a full time nurse and a part time painter.Her painting qualifies as a hobby.Her gross income from painting is $7,000.Her expenses include $800 of interest on inventory loans,$5,200 of expenses in conducting business activities,and $2,000 of depreciation of equipment.Which of the following statements about Sadie's hobby activity is/are correct? I.Sadie will not recognize any taxable income as a result of her hobby. II.Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the year. III.Sadie will lose at least $1,000 of her depreciation deduction for the current year. IV.If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses.

Girardo owns a condominium in Key West.During the year,Girardo uses the condo a total of 22 days.The condo is also rented to vacationers for a total of 78 days and generates rental income of $24,000.Girardo incurs the following expenses before allocation: Mortgage interest \ 8,000 Property taxes 3,600 Utilities 4,000 Insurance 2,400 Depreciation 22,000 The amount of depreciation that Girardo may deduct with respect to the rental property is

Pedro owns 5 rental properties.He contracts with East Lake Properties,Inc.,to manage the real estate.East Lake obtains tenants,negotiates leases,makes necessary repairs,pays expenses related to the properties,and remits monthly net receipts to Pedro. I.Pedro's sale of the properties at a gain will result in a capital gain. II.Pedro's sale of the properties at a loss results in an ordinary loss on his tax return.

Twin City Manufacturing Corporation is an accrual basis taxpayer.Twin City Manufacturing provides medical insurance for its employees through a self-insured reimbursement plan.Twin City Manufacturing pays $100 per month per employee into the plan fund.The fund is then used to reimburse employees' medical expenses.During the current year,Twin City Manufacturing Corp.pays $12,000 into the fund and pays medical reimbursement claims of $10,600. I.If Twin City Manufacturing is an accrual basis taxpayer it can deduct $12,000. II.If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.

Match each statement with the correct term below. -Active Trader

Jackie recently retired from the U.S.Coast Guard after 30 years of service.She would like to open a boat shop to operate in her retirement years.Jackie incurs $3,800 of expenses while investigating sites for her shop and while checking out boat franchises.What are the tax effects of the expenses Jackie incurs? I.If Jackie enters the boat business,she can deduct the costs only by capitalizing them and amortizing them over 180 months. II.They are not deductible if Jackie does not enter the ski and boat business.

Which of the following is/are currently deductible trade or business expenses? I.Membership dues to an environmental lobbying group. II.Cost of acquiring a new business automobile.

Kelly buys a new Lexus for $48,750 in the current year to use in her commercial real estate business.Kelly cannot deduct the cost of the automobile in the current year,because

Angela is an accrual basis taxpayer.On September 1 of the current year,she prepays the annual premium of $4,800 for a one-year fire insurance policy on the contents of her business warehouse.The expense is not material for either financial or tax purposes.The prepayment is necessary to activate the insurance coverage and maintain annual renewals.How much may Angela deduct in the current year?

Ona is a professional musician.She prepared her music teacher's tax return in exchange for music lessons.Since she is a cash basis taxpayer,she cannot take a deduction for the music lessons.

Electronic City sells various electronic products.With each of its products,Electronic City offers customers the option of purchasing a repair contract.Under the contracts,Electronic City will make repairs anytime during the term of the contract.Electronic City estimates that repair costs related to this year's sales will be $39,000.During the current year,Electronic City incurs repair costs of $37,000 related to prior year's contracts and $4,000 on contracts sold this year. I.If Electronic City accounts for the contracts using the accrual method of accounting,its repair cost deduction is $39,000. II.If Electronic City accounts for the contracts using the cash method of accounting,its repair cost deduction is $41,000.

Business expenses include I.expenditures that have a business purpose II.expenditures that are incurred for the production of income.

Match each statement with the correct term below. -Reasonable Expense

Match each statement with the correct term below. -All-events Test

Walter pays a financial adviser $2,100 to help him manage his investment portfolio during the current year.Walter receives $5,000 in interest from investments in General Motors and Xerox bonds,and $2,500 in interest from investments in City of San Francisco bonds.How much may Walter deduct for the current year?

Income tax accounting methods and financial accounting methods differ in many ways.Which of the following tax law provisions are likely to create permanent differences between taxable income and financial (or book)income of a single entity? I.Treatment of payment of penalties and fines. II.Disallowance of 50% of the cost of business meals and entertainment.

Match each statement with the correct term below. -Personal Expense