Question 1

Which of the following can be deducted as a trade or business expense?

Accepted Answer

A) Lobbying expenses to influence taxpayers. 
B) Political contribution to elect a local Congressman. 
C) Illegal bribes to government 
D) Rent paid on a office to run an illegal gambling operation. 
E) None of the above can be deducted. 
A) Lobbying expenses to influence taxpayers. 
B) Political contribution to elect a local Congressman. 
C) Illegal bribes to government 
D) Rent paid on a office to run an illegal gambling operation. 
E) None of the above can be deducted.

Question 2

Landis is a single taxpayer with an adjusted gross income of $280,000.In addition to his personal residence,Landis owns a vacation home in Beaver Creek,Colorado.He uses the vacation home for 21 days during the current year and rents it out to unrelated parties for 63 days.After making the appropriate allocation between rental and personal use,the following rental loss is determined:
$\begin{array}{lr}
\text { Rental income } & \$ 14,000 \
\text { Mortgage interest and property taxes } & (3,200) \
\text { Utilities, maintenance, and repairs } & (6,000) \
\text { Depreciation } & (8,000) \
\text { Rental loss } & \$(3,200)
\end{array}$
What is the correct reporting of the rental income and expenses?
I.Because the rental shows a loss,Landis reports no income and deducts the mortgage interest and property taxes as an itemized deduction.
II.Landis must report the $14,000 in rental income but he can deduct only $14,000 of the expenses.
III.Landis's depreciation deduction is limited to $4,800.
IV.Because the vacation home is a qualified second residence,Landis can deduct the $1,600 loss for adjusted gross income.

Accepted Answer

A) Only statement II is correct. 
B) Only statement IV is correct. 
C) Only statement I is correct. 
D) Statements II and III are correct. 
E) Statements II and IV are correct. 
A) Only statement II is correct. 
B) Only statement IV is correct. 
C) Only statement I is correct. 
D) Statements II and III are correct. 
E) Statements II and IV are correct.

Question 3

Which of the following is/are trade or business expenses?
I.Mahlon incurs expenses related to investing in stocks and bonds.Mahlon is a Sociology professor at State University but spends 10-15 hours per week on his investments.Almost 2/3 of Mahlon's annual income comes from his investments as dividends and interest.
II.Shaheen has expenses related to managing her portfolio of securities.The short-term trading of her securities generates most of her annual income.She has no other job.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 4

An accrual basis taxpayer may deduct expenses in the year in which certain tests are met.These tests include
I.when services or property are provided to the taxpayer or when the taxpayer uses the property.
II.when the "all-events test" is met.
III.when "economic performance" has occurred.
IV.when all events have occurred to determine that a liability exists and the amount of the liability can be determined with reasonable accuracy.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Statements I and IV are correct. 
D) Statements II and III are correct. 
E) Statements I, II, III, and IV are correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Statements I and IV are correct. 
D) Statements II and III are correct. 
E) Statements I, II, III, and IV are correct.

Question 5

Indicate which of the following statements is/are correct:
I.A cash basis taxpayer may deduct prepaid rent if it will be used-up within one year of prepayment and the payment is required to be made.
II.An accrual basis taxpayer must satisfy an all-events test and an economic performance test to claim a deduction.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 6

Using the tests for deductibility discussed in Chapter 5,explain why the following expenses are not deductible.
a.Mel is a sprint car racer. He does repair and maintenance on his cars in the garage at his home. After repairing the cars, he tests them on city streets. He received 15 citations (totaling $2,900) for speeding, running stop signs, and reckless driving.
b.Albert, a carpenter, pays his 10-year-old son $150 a week to empty waste cans in his work shop. Albert's son works each evening and two hours on Saturday morning.
c.Sharon contributes $25 to a local organization that is campaigning against a foreign trade bill. The legislation would damage Sharon's business.
d.Marline borrows $5,000 and pays $500 in interest. The loan is used to purchase bonds issued by the City of Lafayette School District.
e.Christine is the wife of a physician, and she is an experienced horseman. She has raised horses for ten years and occasionally shows them for prize money. She also boards horses for monthly fees. She enjoys her horse activity but has never made a profit in any year. Her horses are appraised at $200,000.

Accepted Answer

a.The citations are violations of public

Question 7

Harold is a 90% owner of National Homes Construction,an accrual basis S corporation.On December 30,2013,National Homes accrues a $100,000 bonus to Harold,payable on February 15,2014.
I.If Harold is an accrual basis taxpayer,National Homes deducts the bonus in 2013 and Harold reports the income in 2014.
II.If Harold is a cash basis taxpayer,National Homes deducts the bonus in 2013 and Harold reports the income in 2014.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 8

Match the proper deduction method with the correct expenditures.
-Premiums the insured taxpayer pays for life insurance

Accepted Answer

A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure 
A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure

Question 9

Which of the following is/are trade or business expenses?
I.Solly incurs legal expenses related to real estate he leases to Bucko Burger Hamburger Haven for a parking lot.Solly does little but negotiate the lease every year..
II.Susan owns several rental apartments.She negotiates new rental contracts,arranges for repairs and maintenance,and handles all leasing activities.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 10

Match the proper deduction method with the correct expenditures.
-Investment expenditures related to earning interest from municipal bonds

Accepted Answer

A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure 
A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure

Question 11

Mike and Pam own a cabin near Teluride,Colorado.In the current year the cabin was rented for 8 days to friends.Mike and Pam used the cabin a total of 82 days during the same year.After allocating the expenses between personal and rental use,the following rental loss was determined:
$\begin{array}{ll}
\text { Rental income } & \$ 700 \
\text { Property taxes } & (250) \
\text { Mortgage interest } & (300) \
\text { Repairs and maintenance } & (100) \
\text { Utilities } & (150) \
\text { Rental loss } & \$(100)
\end{array}$
How should Mike and Pam report the rental income and expenses for last year?

Accepted Answer

A) Report the $100 loss for AGI. 
B) Include the $700 in gross income, but no deductions are allowed. 
C) Only expenses up to the amount of $700 rental income may be deducted. 
D) Report the interest ($300) and taxes ($250) as itemized deductions and the other expenses for AGI. 
E) No reporting for the rental activity is necessary. 
A) Report the $100 loss for AGI. 
B) Include the $700 in gross income, but no deductions are allowed. 
C) Only expenses up to the amount of $700 rental income may be deducted. 
D) Report the interest ($300) and taxes ($250) as itemized deductions and the other expenses for AGI. 
E) No reporting for the rental activity is necessary.

Question 12

Which of the following expenses is/are deductible?
I.Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business.
II.A $4,000 contribution to the mayor's campaign fund.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 13

A business expense includes
I.an expenditure that satisfies the dominant profit-motive requirement.
II.an expenditure that is incurred in a trade or business activity.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 14

Pamela owns the building where her plumbing supply business is located.This year she put on vinyl siding to replace the weathered wood siding on her building.The cost of the new siding can be expensed in the current year.

Accepted Answer

A) True 
 B)False

Question 15

Jennifer pays the following expenses for her dependent 30-year old daughter while the daughter was ill during the current year:
$$\begin{array} { l r } 
\text { Real estate taxes on daughter's house } & \$ 3,000 \
\text { Utilities on daughter's house } & 1,000 \
\text { Interest on the daughter's home mortgage } & 8,000 \
\text { Interest on daughter's car } & 800 \
\text { Daughter's medical expenses } & 6,000
\end{array}$$
How much of the above expenditures may Jennifer use in computing her itemized deductions?

Accepted Answer

A) $ - 0 - 
B) $ 6,000 
C) $ 9,000 
D) $14,800 
E) $17,000 
A) $ - 0 - 
B) $ 6,000 
C) $ 9,000 
D) $14,800 
E) $17,000

Question 16

Jack and Cheryl own a cabin near Copper Mountain,Colorado.During the year,Jack and Cheryl rent the cabin for 30 days to friends for $1,800.Jack and Cheryl use the cabin a total of 60 days during the year.After making the appropriate allocation of planned expenses between personal and rental use,the following rental loss was determined:
$$\begin{array} { l r } 
\text { Rental income } & \$ 1,800 \
\text { Property taxes } & ( 250 ) \
\text { Mortgage interest } & ( 950 ) \
\text { Repairs and maintenance } & ( 200 ) \
\text { Utilities } & ( 300 ) \
\text { Depreciation } & ( 400 ) \
\text { Rental loss } & \$ ( 300 )
\end{array}$$
How should Jack and Cheryl report the rental income and expenses for the forthcoming year?
I.Only expenses up to the amount of $1,800 rental income may be deducted for the year.
II.Only depreciation in the amount of $100 may be deducted.
III.The amount of the disallowed depreciation deduction ($300)can be carried forward.
IV.Nothing needs to be reported.

Accepted Answer

A) Only statement I is correct. 
B) Statements II and III are correct. 
C) Statements I, II and III are correct. 
D) Statements III and IV are correct. 
E) Statements I, II, III, and IV. 
A) Only statement I is correct. 
B) Statements II and III are correct. 
C) Statements I, II and III are correct. 
D) Statements III and IV are correct. 
E) Statements I, II, III, and IV.

Question 17

For a taxpayer to be engaged in a trade or business,the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Accepted Answer

A) True 
 B)False

Question 18

Morgan,a banker,is an amateur photographer who takes pictures at weddings and parties.He earned $1,000 but incurred $1,200 in related expenses.Since he takes a standard deduction,he will have to include the $1,000 in income but will not get any benefit from the expenses.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following people is currently engaged in a trade or business?
I.Barry spends 4 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 income from dividends and long-term gains from holding investments for appreciation in value.
II.Jennifer is a full-time realtor,and she owns a house that she rents to Barry and his family for $900 a month.Jennifer provides for the repairs and maintenance of the house,and she stops by monthly to collect the rent and visit with Barry and his family.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 20

An exception to the economic performance test allows the deduction of year-end accruals if
I.Either the expense is not material for both tax and financial purposes or the accrual results in a better matching of revenue and expenses.
II.The taxpayer consistently treats the item as incurred in the year the all events test is met.

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Which of the following can be deducted as a trade or business expense?

Match the proper deduction method with the correct expenditures. -Premiums the insured taxpayer pays for life insurance

Match the proper deduction method with the correct expenditures. -Investment expenditures related to earning interest from municipal bonds

Which of the following expenses is/are deductible? I.Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business. II.A $4,000 contribution to the mayor's campaign fund.

A business expense includes I.an expenditure that satisfies the dominant profit-motive requirement. II.an expenditure that is incurred in a trade or business activity.

Pamela owns the building where her plumbing supply business is located.This year she put on vinyl siding to replace the weathered wood siding on her building.The cost of the new siding can be expensed in the current year.

For a taxpayer to be engaged in a trade or business,the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Morgan,a banker,is an amateur photographer who takes pictures at weddings and parties.He earned $1,000 but incurred $1,200 in related expenses.Since he takes a standard deduction,he will have to include the $1,000 in income but will not get any benefit from the expenses.

Federal Income Taxation - an Overview

Income Tax Concepts

Income Sources

Income Exclusions

Business Expenses

Losses: Deductions and Limitations

Taxation of Individuals

Acquisitions of Property

Cost Recovery on Property: Depreciation,depletion,and Amortization

Property Dispositions

Nonrecognition Transactions

Choice of Business Entity - General Tax and Nontax Factorsformation

Choice of Business Entity - Operations and Distributions

Choice of Business Entity - Other Considerations

Tax Research

Filters

Exam 5: Introduction to Business Expenses

Which of the following can be deducted as a trade or business expense?

Match the proper deduction method with the correct expenditures. -Premiums the insured taxpayer pays for life insurance

Match the proper deduction method with the correct expenditures. -Investment expenditures related to earning interest from municipal bonds

Which of the following expenses is/are deductible? I.Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business. II.A $4,000 contribution to the mayor's campaign fund.

A business expense includes I.an expenditure that satisfies the dominant profit-motive requirement. II.an expenditure that is incurred in a trade or business activity.

Pamela owns the building where her plumbing supply business is located.This year she put on vinyl siding to replace the weathered wood siding on her building.The cost of the new siding can be expensed in the current year.

For a taxpayer to be engaged in a trade or business,the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Morgan,a banker,is an amateur photographer who takes pictures at weddings and parties.He earned $1,000 but incurred $1,200 in related expenses.Since he takes a standard deduction,he will have to include the $1,000 in income but will not get any benefit from the expenses.

Federal Income Taxation - an Overview

Income Tax Concepts

Income Sources

Income Exclusions

Business Expenses

Losses: Deductions and Limitations

Taxation of Individuals

Acquisitions of Property

Cost Recovery on Property: Depreciation,depletion,and Amortization

Property Dispositions

Nonrecognition Transactions

Choice of Business Entity - General Tax and Nontax Factorsformation

Choice of Business Entity - Operations and Distributions

Choice of Business Entity - Other Considerations

Tax Research

Filters