Exam 5: Introduction to Business Expenses

In which of the following independent situations is the taxpayer entitled to deduct expenses related to the home office? I.A real estate agent employed by a local real estate agency owns several rental properties.She regularly and exclusively uses a second bedroom in her home solely as an office for bookkeeping and other activities related to management of the rental properties.She has no other place to perform these functions. II.An attorney employed by a large law firm frequently brings work home from the office.She uses a study in her home for doing this work as well as managing her investment portfolio.

Generally income tax accounting methods are designed to result in I.a proper matching of expenses to the revenues being generated. II.a denial of a current deduction for costs that will not have to be paid in the near future.

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include I.Personal expenses. II.Trade or business expenses. III.Expenses for the production of income.

Match the proper deduction method with the correct expenditures. -Political contributions

Generally income tax accounting methods are designed to result in I.a proper application of the wherewithal-to-pay concept. II.a proper matching of expenses to the revenues being generated.

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

Michelle is a bank president and a weekend artist.She regularly sells her paintings at flea markets and spends an average of 9 hours a week painting or selling.Although she made about $6,000 last year from sales of artwork,she tells her friends she would do it for free.For the current tax year,she incurs expenses of $800 primarily for admission fees to flee markets and art fairs.The $800 is I.deductible for AGI as a business expense. II.a miscellaneous itemized deduction. III.is deductible only because she has revenue from the activity.

Match the proper deduction method with the correct expenditures. -Repair-and-maintenance expenditures

Match each statement with the correct term below. -Economic Performance

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

Davis owns and operates a convenience store on the north side of the city.He has always wanted to operate a sports bar.When he hears of a new shopping center development in the south part of the city,he contacts the developer and begins negotiations to open his dream enterprise. I.If negotiations are successful and Davis incurs $40,000 in start-up costs to open his new business,he can deduct up to $5,000 of the start-up costs and must capitalize the costs of investigation and start-up exceeding $5,000. II.If Davis decides not to open his bar and restaurant,the investigation expenses are fully deductible.

Several factors are used to determine whether an activity is classified as a hobby or as a business.Which of the following are factors that aid in this determination? I.The financial status of the taxpayer II.The expectation that the assets involved in the activity will increase in value. III.The taxpayer's success in similar activities. IV.The amount of personal pleasure and enjoyment that accrues to the taxpayer.

Cornelius owns a condominium in Orlando.During the year,Cornelius uses the condo a total of 25 days.The condo is also rented to vacationers for a total of 75 days and generates rental income of $9,000.Cornelius incurs the following expenses: Mortgage interest \ 4,000 Property taxes 1,800 Utilities 2,000 Insurance 1,200 Depreciation 10,000 Determine Cornelius's deduction related to the condominium.Indicate the amount of each expense that can be deducted and how it would be deducted.

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

Tom,Dick,and Harry operate Quality Stores.Based on advice from Tom's sister,a CPA,the three form a partnership.Tom owns 50%; Dick and Harry each own 25%.For the year,Quality Stores reports the following: Sales revenues \ 800,000 Business expenses (440,000) Investment expenses (4,000) Short-term capital gains 26,000 Long-term capital losses (14,000) Taxable income \ 368,000 By how much will Tom's adjusted gross income increase because of the above?

Match the proper deduction method with the correct expenditures. -Covenant not to compete for 4 years

Janine,a cash-basis taxpayer,borrowed $15,000 for her business from a local bank three years ago.To increase her deductions for 2013,she pays December interest of $150 and prepays January and February interest totaling $300.The maturity date of the note is November 30,2014.How much of the interest is deductible in 2013?

Sheila extensively buys and sells securities.The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore,Shelia must be

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 an entity? I.The cost of certain property is allowed to be deducted in the year of acquisition rather than through regular depreciation methods. II.Tax depreciation is computed over a statutory life rather than the asset's useful life.

In order to take a business deduction,the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.