Exam 5: Introduction to Business Expenses

Pedro owns 5 rental properties.He contracts with East Lake Properties,Inc.,to manage the real estate.East Lake obtains tenants,negotiates leases,makes necessary repairs,pays expenses related to the properties,and remits monthly net receipts to Pedro. I.Pedro's sale of the properties at a gain will result in a capital gain. II.Pedro's sale of the properties at a loss results in an ordinary loss on his tax return.

Walter pays a financial adviser $2,100 to help him manage his investment portfolio during the current year.Walter receives $5,000 in interest from investments in General Motors and Xerox bonds,and $2,500 in interest from investments in City of San Francisco bonds.How much may Walter deduct for the current year?

Henry owns a hardware store in Indianapolis.He has decided to expand his business interests and is considering opening a golf store in a neighboring town.He has incurred $12,000 of expenses investigating whether to open the new golf store.In July of the current year he finds the perfect location and opens the golf store on October 1.What amount of the investigation expenses can he deduct in the current year?

Which of the following expenditures are not deductible because they are personal in nature? I.Premiums paid on liability insurance for the taxpayer. II.Education costs that improves the taxpayer's skills in his/her trade or business.

Which of the following expenses is/are deductible? I.Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business. II.A $4,000 contribution to the mayor's campaign fund.

Angel owns a gourmet Mexican restaurant.His head chef,Carmen,is arrested for a parole violation.Because Angel needs Carmen back to work as soon as possible,Angel pays her bail of $250,attorney's fees of $300,and a court fine of $200. I.A business purpose exists for the payments. II.If Carmen were required to repay the expenditures,it would constitute a loan and not be deductible for Angel. III.If Angel does not require Carmen to repay the amounts paid on Carmen's behalf,the payments constitute compensation and Angel gets a deduction for the expenses paid.

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include I.Personal expenses. II.Trade or business expenses. III.Expenses for the production of income.

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?

Jim operates a business out of his home.One room in his home is used for business and qualifies as a home office.Which of the following allocable expenditures can Jim use in computing his home office expense deduction? I.Jim pays his housekeeper $25 a week to sweep,dust and straighten-up his office. II.Jim's fire and casualty insurance premiums on his home are $800.

Michelle is a bank president and a weekend artist.She regularly sells her paintings at flea markets and spends an average of 9 hours a week painting or selling.Although she made about $6,000 last year from sales of artwork,she tells her friends she would do it for free.For the current tax year,she incurs expenses of $800 primarily for admission fees to flee markets and art fairs.The $800 is I.deductible for AGI as a business expense. II.a miscellaneous itemized deduction. III.is deductible only because she has revenue from the activity.

Business expenses include I.expenditures that have a business purpose II.expenditures that are incurred for the production of income.

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..

Which of the following expenses is/are deductible? I.Transportation and lodging expenses of $3,000 incurred to monitor state legislation that may affect the taxpayer's business. II.Lobby expenses of $300 during the year to influence local town legislators to support pro-business legislation.

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.

An exception to the economic performance test allows the deduction of year-end accruals if I.Either the expense is not material for both tax and financial purposes or the accrual results in a better matching of revenue and expenses. II.The taxpayer consistently treats the item as incurred in the year the all events test is met.

An individual is indifferent whether an expense is deducted for or deducted from adjusted gross income.

Landis is a single taxpayer with an adjusted gross income of $280,000.In addition to his personal residence,Landis owns a vacation home in Beaver Creek,Colorado.He uses the vacation home for 21 days during the current year and rents it out to unrelated parties for 63 days.After making the appropriate allocation between rental and personal use,the following rental loss is determined: $\begin{array}{lr}\text { Rental income } & \$ 14,000 \\\text { Mortgage interest and property taxes } & (3,200) \\\text { Utilities, maintenance, and repairs } & (6,000) \\\text { Depreciation } & \underline {(8,000)}\\\text { Rental loss }&\$(3,200)\end{array}$ What is the correct reporting of the rental income and expenses? I.Because the rental shows a loss,Landis reports no income and deducts the mortgage interest and property taxes as an itemized deduction. II.Landis must report the $14,000 in rental income but he can deduct only $14,000 of the expenses. III.Landis's depreciation deduction is limited to $4,800. IV.Because the vacation home is a qualified second residence,Landis can deduct the $1,600 loss for adjusted gross income.

Sarah extensively buys and sells securities .The IRS has determined upon examination that she is in a trade or business concerning the securities' transactions and therefore,Sarah is

In order to take a business deduction,the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

During the current year,Paul came down with a serious illness.Paul's uncle paid many of Paul's expenses during the period of rehabilitation.For tax purposes,how are Paul's mortgage interest and real estate property taxes handled? I.Paul can deduct both items. II.Paul's uncle can deduct both items. III.Neither Paul nor his uncle can deduct the expenses.