Exam 5: Introduction to Business Expenses

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: ​ How should Mike and Pam report the rental income and expenses for last year?

Match each statement with the correct term below. -Home office deduction

Devery,Inc.sells high tech machine parts that are fully warranted against defects.Based on prior years experience they can expect to incur $20,000 of warranty expense on current sales.They are on the accrual basis,and the warranty expense is based on a reasonable estimate,so Devery can deduct the $20,000.

Safina is a high school teacher.She has set aside one room in her home exclusively as a home office where she grades papers,prepares for class,etc.No revenues are generated from her activities.Depreciation and maintenance are $800 on the home office space.How much of the expenses are deductible by Safina?

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

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. ​

Virginia,a practicing CPA,receives $11,000 from the sale of rare orchids that she grows.Her expenses of operating this hobby activity follow: ​ How much of the expenses that Virginia incurs can be deducted as hobby expenses?

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

Indicate which of the following statements is/are correct: I.An accrual basis taxpayer who gives a creditor his note payable in payment of a claim may deduct the related expense when the note is given. II.When a cash basis taxpayer uses a credit card to pay for an expense it can deduct the expense when the expense is charged to the credit card.. ​

Bowen is planning to quit his job as a plumber and open a paint store.He has incurred expenses of $8,000 dealing with the opening of the store and will be able to deduct all of these expenses.

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

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.

Generally income tax accounting methods are designed to result in I.a tax based on the amount of cash available in the current period to pay taxes. II.a denial of a current deduction for costs that will not have to be paid in the near future. ​

List the criteria necessary for an expenditure to be deductible as a trade or business expense or an expense for the production of income.

Which of the following is not deductible?

Which of the following factors are used to aid in determining whether an activity that earns income is profit motivated and should be treated as a business or is subject to the hobby loss rules? I.The taxpayer's financial status. II.Elements of personal pleasure derived from the activity. ​

A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

Jenny,an individual cash basis taxpayer,has $6,000 of state income taxes withheld from her salary during 2017.When she filed her 2016 state income tax return during April 2017,she paid an additional $500 in state income taxes.When she filed her 2017 state income tax return in April 2018,she received a $200 refund.What is her state income tax deduction for 2017 for federal income tax purposes?

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

Using the tests for deductibility discussed in Chapter 5,explain why the following expenses may not be fully deductible in the current year a.Janet pays $900 in interest on debt she incurred to purchase municipal bonds.The bonds pay $1,500 of interest in the current year. b.Andrew owns a retail-clothing store.Andrew has the opportunity to obtain a franchise to operate a discount sporting goods store.He spends $5,000 investigating the possibility of opening a sporting goods store in a neighboring town. c.Jane owns a fitness center.She employs the star basketball player at Local University as an aerobics instructor.Because of his reputation,she pays him $20 an hour.Jane pays her other aerobics instructors $10 an hour. d.Alvin makes a vacation trip to Florida,and while there spends two days investigating the feasibility of opening up a new office of his optometry practice.