Exam 5: Introduction to Business Expenses

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. ​

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. ​

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

Wanda owns and operates a restaurant on the north side of Cleveland.She is considering opening a second restaurant on the south side of town and incurs $13,600 of investigation expenses.In July of the current year,Wanda decides not to open a second restaurant.How much of the investigation expenses can Wanda deduct in the current year?

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. ​

An ordinary expense I.is an expense commonly incurred in an income-producing activity. II.is an expenditure that provides future benefits to an income-producing activity. ​

In the current year,Paul acquires a car for $16,000.He uses the car in his advertising business and for personal purposes.His records indicate the car is used 60% for business and that the total operating expenses,including depreciation,are $4,700.Paul expects to use the car for 5 years in his business.What amount can Paul deduct as the operating costs of the car?

Match each statement with the correct term below. -Vacation home expense

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

Christy purchases $1,000-worth of supplies from a local vendor.The supplies are delivered on March 29,2017.The supplies are fully used up by year end.Because of unusual circumstances,a bill for the supplies arrives from the vendor on January 10,2018,and is promptly paid.When can Christy deduct the expenses? I.In 2017,if she is an accrual basis taxpayer. II.In 2018,if she is a cash basis taxpayer. ​

Chelsea operates an illegal gambling enterprise out of her restaurant.Considering only the following expenses,what amount can Chelsea deduct? ​

Amy borrowed $25,000 for her business from a local bank two years ago.To increase her deductions for 2017,she pays December interest of $400 and prepays January and February interest totaling $800 on December 30,2017.The maturity date of the note is November 30,2018.How much of the interest that she paid in December is deductible in 2017? 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. ​

Match each statement with the correct term below. -Profit motivated business expenses

Match each statement with the correct term below. -Capital expenditure

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. ​

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

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.

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. ​

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

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. ​