Exam 5: Introduction to Business Expenses

Sergio purchases $3,000-worth of supplies from a local vendor.The supplies are delivered on April 1,2013.The supplies are fully used up on December 31,2013.Because of unusual circumstances,a bill for the supplies arrives from the vendor on February 1,2014,and is promptly paid.When can Sergio deduct the expenses? I.In 2013,if he is an accrual basis taxpayer. II.In 2013,if he is a cash basis taxpayer.

Match the proper deduction method with the correct expenditures. -Start-up costs over $5,000.

Bonnie's sister,Diane,wants to open a restaurant.Because Diane is short of funds,Bonnie purchases the building and leases it to Diane.No agreement is signed,and Bonnie tells Diane not to worry about paying rent until the cash flow can support it.Also,Bonnie promises not to sell the property to anyone other than Diane. I.Any expenditures Bonnie makes regarding the building would be classified as production of income expenses. II.The building rental has the characteristics of a gift. III.The dominant motive in acquiring the building is to earn an economic benefit (profit). IV.Bonnie's property tax expenses related to the property are deductible.

Which of the following requirements does not have to be met for a business or investment expense to be deductible:

Which of the following factors absolutely must be present for an activity to be considered a trade or business for tax purposes?

Due to a shortage of cash,East Coast Entertainment Company,an accrual basis taxpayer,could not pay its November 2013 utility bill on time.In February of 2014,East Coast Entertainment pays the utility bill. I.East Coast can deduct the expense on either its 2013 or 2014 tax return. II.East Coast cannot deduct the utility expense in 2013 because it is paid in 2014.

Which of the following people are currently engaged in a trade or business? I.Willie devotes 45 hours per week to betting on horse 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. II.Daryl owns 214 home sites in and around Orlando,Florida.He bought these vacant lots several years ago in hoping that they would appreciate in value so he could sell them at a profit.Because of the recreational activities in the area,the building lots are worth several times his original cost.He is getting the lots ready to sell this year.

Paul owns a lumber yard in Portland.He has decided to expand his business interests and is considering opening a golf course in Seattle.He has incurred $51,000 of expenses investigating whether to open the new golf course.In January of the current year he finds the perfect location and opens the golf course on July 1.What amount of the investigation expenses can he deduct in the current year?