Question 1

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

Accepted Answer

A) Specifically disallowed. 
B) Appropriate and helpful. 
C) Considered a trade or business. 
D) Not considered a trade or business. 
E) Problems with this generally arise with related parties.
F)This is met when services or property are provided to the taxpayer.
G)Normal, common, and accepted but not necessarily regularly recurring.
H)This is met when the existence and the amount of a liability have been established. 
A) Specifically disallowed. 
B) Appropriate and helpful. 
C) Considered a trade or business. 
D) Not considered a trade or business. 
E) Problems with this generally arise with related parties.
F)This is met when services or property are provided to the taxpayer.
G)Normal, common, and accepted but not necessarily regularly recurring.
H)This is met when the existence and the amount of a liability have been established. F

Question 2

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. B

Question 3

Discuss whether the following persons are currently engaged in a trade or business:
a.Darlene has expenses related to managing her portfolio of securities.The trading of the securities generates most of her annual income.She generally does not hold securities long-term.She buys and sells continuously.She has no other job.
b.Mark incurs expenses related to investing in stocks and bonds.Mark is a Sociology professor at Indiana University but spends 10-15 hours per week on his investments.Approximately 70% of Mark's annual income come from his investments as dividends and interest.
c.Paul leases real estate to Floyd's Barber Shop for a parking lot.The only expense he incurs is legal expense regarding the lease,which he renegotiates annually.
d.Mandy owns several rental apartments.She arranges for repairs and maintenance,pays for the expenses related to the properties,and handles all leasing activities.

Accepted Answer

a.Yes.This is her primary income-generating activity.She has no other job.She is actively engaged in the activity through her management of her securities portfolio.
b.No.Although almost 70% of his income comes from the investments,this is not Mark's primary activity.This is not his livelihood.He is primarily an employee of Local University.Most of his time is spent engaged in his duties as a professor.
c.No.Leasing the property is not a trade or business for Paul.Paul is not actively involved with the lease activity.He does nothing other than sign the lease.
d.Yes.Mandy actively manages the property.She performs all of the necessary duties to manage the enterprise.

Question 4

Andy lives in New York and rents his house for two weeks during the U.S.Open Tennis tournament for $3,500.He must include the rent in his income.

Accepted Answer

A) True 
 B)False

Question 5

Karen owns a vacation home in Door County,Wisconsin.During the year,she rents it out for two weeks and uses it personally for three weeks.Her expenses directly related to renting out the property were utilities $300,and maid service $150.The portion of taxes allocable to the rental activity is $600 and revenue from the rental is $1,000.Karen will

Accepted Answer

A) report no income and deduct $50. 
B) report no income and deduct no rental expenses related to the vacation home. 
C) report income of $1,000 and deduct $450 of expenses for adjusted gross income. 
D) report income of $1,000 and $150 of expenses from adjusted gross income. 
E) report income of $1,000 and deduct $1,000 of expenses for adjusted gross income. 
A) report no income and deduct $50. 
B) report no income and deduct no rental expenses related to the vacation home. 
C) report income of $1,000 and deduct $450 of expenses for adjusted gross income. 
D) report income of $1,000 and $150 of expenses from adjusted gross income. 
E) report income of $1,000 and deduct $1,000 of expenses for adjusted gross income.

Question 6

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

Accepted Answer

A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities. 
A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 7

Tom and RoseMary own a cabin near Stowe,Vermont.During the current year the cabin is rented for 31 days for $1,800.Tom and RoseMary used the cabin a total of 12 days during the year.After making the appropriate allocation of expenses between personal and rental use,the following rental loss was determined:
$$\begin{array} { l r } 
\text { Rental income } & \$ 1700 \
\text { Property taxes } & ( 150 ) \
\text { Mortgage interest } & ( 950 ) \
\text { Repairs and maintenance } & ( 400 ) \
\text { Utilities } & ( 300 ) \
\text { Depreciation } & \underline { ( 200 )} \
\text { Rental loss } & \underline { \$ ( 300 )}
\end{array}$$
How should Tom and RoseMary report the rental income and expenses for the current year?

Accepted Answer

A) Include the $1,700 in gross income, but no deductions are allowed. 
B) Report the $300 loss for AGI. 
C) Only expenses up to the amount of $1,700 rental income may be deducted in the current year. 
D) Report the interest ($950) and taxes ($150) as itemized deductions and the other expenses for AGI. 
E) No reporting for the rental activity should be reported. 
A) Include the $1,700 in gross income, but no deductions are allowed. 
B) Report the $300 loss for AGI. 
C) Only expenses up to the amount of $1,700 rental income may be deducted in the current year. 
D) Report the interest ($950) and taxes ($150) as itemized deductions and the other expenses for AGI. 
E) No reporting for the rental activity should be reported.

Question 8

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

Accepted Answer

A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities. 
A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 9

Twin City Manufacturing Corporation is an accrual basis taxpayer.Twin City Manufacturing provides medical insurance for its employees through a self-insured reimbursement plan.Twin City Manufacturing pays $100 per month per employee into the plan fund.The fund is then used to reimburse employees' medical expenses.During the current year,Twin City Manufacturing Corp.pays $12,000 into the fund and pays medical reimbursement claims of $10,600.
I.If Twin City Manufacturing is an accrual basis taxpayer it can deduct $12,000.
II.If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.

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

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.

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 11

In order for a taxpayer to reduce taxable income with a deduction,the tax law must allow it,and it must meet all statutory requirements.

Accepted Answer

A) True 
 B)False

Question 12

Bruce operates an illegal drug business.Which of the following is deductible?

Accepted Answer

A) Commissions paid to dealers. 
B) Rent for a warehouse. 
C) Bribes paid to local police. 
D) Cost of drugs sold. 
E) Interest on debt to finance the purchase of inventory. 
A) Commissions paid to dealers. 
B) Rent for a warehouse. 
C) Bribes paid to local police. 
D) Cost of drugs sold. 
E) Interest on debt to finance the purchase of inventory.

Question 13

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

Accepted Answer

A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities. 
A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 14

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.

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 15

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?

Accepted Answer

A) $- 0 - 
B) $200 
C) $400 
D) $500 
E) $800 
A) $- 0 - 
B) $200 
C) $400 
D) $500 
E) $800

Question 16

Match each statement with the correct term below.
-Production-of-income expense

Accepted Answer

A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities. 
A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 17

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

Accepted Answer

A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities. 
A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 18

Frank is a self-employed architect who maintains a qualifying office in his home.Frank has $80,000 gross income from his practice and incurs $72,000 in salaries,supplies,computer services,etc.Frank's mortgage interest and real estate taxes allocable to the office total $3,000.Other expenses total $9,000 and consist of depreciation,utilities,insurance,and maintenance.Frank's total office in home deductions are

Accepted Answer

A) $ 3,000 
B) $ 5,000 
C) $ 8,000 
D) $ 9,000 
E) $12,000 
A) $ 3,000 
B) $ 5,000 
C) $ 8,000 
D) $ 9,000 
E) $12,000

Question 19

Teresa,Terri,and Tricia operate Sassy Solutions,an exclusive boutique.Based on advice from Teresa's sister,a CPA,the three form a partnership.Teresa owns 50% and Terri and Tricia each own 25%.For the year,Sassy Solutions reports the following:
$\begin{array}{lr}
\text { Sales revenues } & \$ 600,000 \
\text { Business expenses } & (320,000) \
\text { Investment expenses } & (4,000) \
\text { Short-term capital gains } & 26,000 \
\text { Long-term capital losses } & \underline { (14,000)} \
\text { Taxable income } & \underline { \$ 288.000}
\end{array}$
For tax purposes,what amount will Sassy Solutions report to Teresa as her ordinary income from the partnership?

Accepted Answer

A) $144,000 
B) $146,000 
C) $148,000 
D) $138,000 
E) $140,000 
A) $144,000 
B) $146,000 
C) $148,000 
D) $138,000 
E) $140,000

Question 20

Diana bought 1,500 shares of Dalton Protection,Inc.,common stock for $10 per share.She paid her broker a $300 commission to close the purchase.The following year,Diana sold 1,000 of the shares for $17 per share and paid a commission of $175 on the sale.What is Diana's capital gain on the sale of the stock?

Accepted Answer

A) $1,525 
B) $2,000 
C) $6,625 
D) $6,825 
E) $7,000 
A) $1,525 
B) $2,000 
C) $6,625 
D) $6,825 
E) $7,000

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

Andy lives in New York and rents his house for two weeks during the U.S.Open Tennis tournament for $3,500.He must include the rent in his income.

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

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

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.

In order for a taxpayer to reduce taxable income with a deduction,the tax law must allow it,and it must meet all statutory requirements.

Bruce operates an illegal drug business.Which of the following is deductible?

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

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.

Match each statement with the correct term below. -Production-of-income expense

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

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

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

Andy lives in New York and rents his house for two weeks during the U.S.Open Tennis tournament for $3,500.He must include the rent in his income.

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

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

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.

In order for a taxpayer to reduce taxable income with a deduction,the tax law must allow it,and it must meet all statutory requirements.

Bruce operates an illegal drug business.Which of the following is deductible?

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

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.

Match each statement with the correct term below. -Production-of-income expense

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

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