Exam 5: Introduction to Business Expenses

Several factors are used to determine whether an activity is classified as a hobby or as a business.Which of the following are factors that aid in this determination? I.The financial status of the taxpayer II.The expectation that the assets involved in the activity will increase in value. III.The taxpayer's success in similar activities. IV.The amount of personal pleasure and enjoyment that accrues to the taxpayer.

Larry is a history teacher.He subscribes to several periodicals about teaching history and judging history fairs.This year Larry spends $285 on subscriptions to various periodicals.Discuss the deductibility of the expenditures for tax purposes.

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.

Kim owns and operates a restaurant on the north side of Indianapolis.She is considering opening a day care center on the south side of town and incurs $10,400 of investigation expenses.In July of the current year,Kim opens the day care center.How much of the investigation expenses can Kim deduct in the current year?

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

Charlotte traveled to Annapolis to attend a three-day business conference.After her meetings concluded,she stays 2 additional days sightseeing.Charlotte's airfare is $400 and pays $110 per night for lodging,$60 a day for meals,and $20 a day for incidentals.How much of Charlotte's costs can be deducted as a business expense?

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?

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.

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.

Match the proper deduction method with the correct expenditures. -Hobby loss

Mario paints landscape portraits,and he treats the activity as a hobby.During the current year,Mario incurred the following expenses while earning $2,500 from sales of paintings: Paints and supplies \ 2,200 Utilities expenses for his studio 1,000 Advertising 300 Insurance on his studio and equipment 700 Mario uses the standard deduction and never itemizes his deductions.How should Mario report all of the items related to his hobby on his tax return?

Shaheen owns 2 rental properties.She hires her 21 year old son,who is a junior at State College,to obtain tenants,negotiate leases,make arrangements for repairs,and pay expenses related to the properties. I.Shaheen's sale of the properties will result in a capital gain or loss. II.Shaheen's sale of the properties at a loss results in a current-year loss deduction of no more than $3,000.

Cornelius owns a condominium in Orlando.During the year,Cornelius uses the condo a total of 25 days.The condo is also rented to vacationers for a total of 75 days and generates rental income of $9,000.Cornelius incurs the following expenses: Mortgage interest \ 4,000 Property taxes 1,800 Utilities 2,000 Insurance 1,200 Depreciation 10,000 Determine Cornelius's deduction related to the condominium.Indicate the amount of each expense that can be deducted and how it would be deducted.

Wilson owns a condominium in Gatlinburg,Tennessee.During the current year,she incurs the following expenses before allocation related to the property: Mortgage interest \ 10,000 Property taxes 4,000 Utilities 1,000 Maintenance fees 1,300 Repairs 800 Depreciation 6,000 a.For each of the following scenarios indicate whether Wilson would treat the condominium for income tax purposes as personal use property,a rental or a vacation home. Case Rental Income Rental Days Personal Use Days Personal, rental, or vacation A \ 10,000 300 0 B 7,000 60 10 C 15,000 60 20 D 2,000 10 40 E 11,000 280 20 b.Consider Case C.Determine Wilson's deductions related to the condominium.Indicate the amount of each expense that can be deducted and how it would be deducted.

All of the following are a required test for the deduction of a business expense except?

Portia,a CPA,operates a financial and tax planning service.During the months of February,March,and April of every year,she hires graduate tax students from The University of Chicago as interns.This year she hires 4 interns.One is her brother,Sidney.She pays all interns except Sidney $20 per hour for help with tax return preparation and tax research.Sidney receives $25 an hour.She cannot deduct the full amount of Sidney's hourly wages because the expense is not

John decides rather than work late in the office,he does all of his work in an office at home.His employer approves of this arrangement.Since John uses his home office on a regular and exclusive basis,he will be eligible to take a home office deduction even though it was not required as a condition of employment.

Claire and Harry own a house on Hilton Head Island.During the year,Claire and Harry rent the house for 30 days to friends from Texas for $2,000.Claire and Harry use the house a total of 60 days during the year.After making the appropriate allocation of expenses between personal and rental use,the following rental loss was determined: Rental income \ 2,000 Property taxes (250) Mortgage interest (950) Repairs and maintenance (200) Utilities (300) Depreciation Rental loss \ (100) How should Claire and Harry report the rental income and expenses for the forthcoming year? I.Report the $100 loss for AGI.II.Only expenses up to the amount of $2,000 rental income may be deducted for the year. III.Include the $2,000 in gross income,but no deductions are allowed. IV.Nothing needs to be reported.

Match the proper deduction method with the correct expenditures. -Covenant not to compete for 4 years

Janine,a cash-basis taxpayer,borrowed $15,000 for her business from a local bank three years ago.To increase her deductions for 2013,she pays December interest of $150 and prepays January and February interest totaling $300.The maturity date of the note is November 30,2014.How much of the interest is deductible in 2013?