Exam 5: Introduction to Business Expenses

Christy purchases $1,000-worth of supplies from a local vendor.The supplies are delivered on March 29,2013.The supplies are fully used up by year end.Because of unusual circumstances,a bill for the supplies arrives from the vendor on January 10,2014,and is promptly paid.When can Christy deduct the expenses? I.In 2013,if she is an accrual basis taxpayer. II.In 2014,if she is a cash basis taxpayer.

The all-events test requires that I.All events have occurred that determine a liability exists II The due date for payment of the liability has been established III.The amount of a liability is determined with reasonable accuracy.

Which of the following payments are deductible? I.Wilcox pays $1,000 to run an add in the program of the state Independent Party convention II.Wilcox is in the construction business.In January,he sends his chief financial officer to Washington,D.C.,to monitor current legislation affecting the real estate industry.Expenses totaled $2,100. III.In March,Wilcox personally travels to Washington,D.C.,to testify before the banking subcommittee on the effects of proposed legislation on the construction industry.Expenses totaled $2,300.

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

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.

Sergio purchases $3,000-worth of supplies from a local vendor.The supplies are delivered on April 1,2013.The supplies are fully used up on December 31,2013.Because of unusual circumstances,a bill for the supplies arrives from the vendor on February 1,2014,and is promptly paid.When can Sergio deduct the expenses? I.In 2013,if he is an accrual basis taxpayer. II.In 2013,if he is a cash basis taxpayer.

An exception to the economic performance test allows the deduction of year-end accruals if I.The liability exists and the amount of the liability can be reasonably estimated. II.Economic performance occurs within the shorter of 8 1/2 months after the close of the tax year or a reasonable time after the close of the tax year

Which of the following people are currently engaged in a trade or business? I.Willie devotes 45 hours per week to betting on horse races.Although he intends to win large sums,he has failed to win the big one.He considers his betting activities his job and relies on his meager winnings to support his family. II.Daryl owns 214 home sites in and around Orlando,Florida.He bought these vacant lots several years ago in hoping that they would appreciate in value so he could sell them at a profit.Because of the recreational activities in the area,the building lots are worth several times his original cost.He is getting the lots ready to sell this year.

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

In which of the following independent situations is the taxpayer entitled to deduct expenses related to the home office? I.A real estate agent employed by a local real estate agency owns several rental properties.She regularly and exclusively uses a second bedroom in her home solely as an office for bookkeeping and other activities related to management of the rental properties.She has no other place to perform these functions. II.An attorney employed by a large law firm frequently brings work home from the office.She uses a study in her home for doing this work as well as managing her investment portfolio.

The Wilson Corporation incurs the following expenses.Explain whether the following expenses should be capitalized or deducted in the current period. a.Paid $2,500 to blacktop a gravel parking lot. b.Paid $1,900 for new tires on the truck. c.Paid $3,000 for a new fire and security alarm system for the factory. d.Paid $6,250 to paint the interior and exterior of the office and factory building that it just acquired. e.Paid $1,200 for a new compressor for the factory's central air conditioning system.

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.

Clay incurs $5,000 of investment expenses related to purchasing Renco Company stock and New Orleans municipal bonds.He receives $6,000 of dividends on the stock and $14,000 of interest on the bonds.The amount of investment expense Clay can deduct is:

Harold,a cash basis taxpayer,borrows $65,000 for his business on a 2-year note from First City Bank on December 1,2013.To close on the loan agreement,Harold is required to prepay interest of $4,800 on December 1.How much interest can Harold deduct in 2013?

To be deductible,the dominant motive for incurring an expense must be

Which of the following expenditures are not deductible because they are personal in nature? I.Legal costs to acquire a personal residence. II.Losses resulting from the sale of personal residences.

Jennifer pays the following expenses for her dependent 30-year old daughter while the daughter was ill during the current year: Real estate taxes on daughter's house \ 3,000 Utilities on daughter's house 1,000 Interest on the daughter's home mortgage 8,000 Interest on daughter's car 800 Daughter's medical expenses 6,000 How much of the above expenditures may Jennifer use in computing her itemized deductions?

Discuss whether the following persons are currently engaged in a trade or business: a.Katerina owns 35 home sites in and around Orlando.She bought these vacant lots several years ago in hopes to developing them into a subdivision.She begins to develop the lots in the current year. b.John spends 2 hours a day,5 days a week,managing his investment portfolio.He watches the market and buys and sells securities when he thinks the market is right.His investment strategy is to realize dividends,interest,and long-term gains from holding the investments. c.Bill lives in Miami and works full-time betting on dog races.Although he intends to win large sums,he has failed to win the big one.He considers his betting activities his job and relies on his meager winnings to support his family.He is devoted to the races and has rarely missed a day betting in over 3 years. b.John spends 2 hours a day, 5 days a week, managing his investment portfolio. He watches the market and buys and sells securities when he thinks the market is right. His investment strategy is to realize dividends, interest, and long-term gains from holding the investments. c.Bill lives in Miami and works full-time betting on dog races. Although he intends to win large sums, he has failed to win the big one. He considers his betting activities his job and relies on his meager winnings to support his family. He is devoted to the races and has rarely missed a day betting in over 3 years.

Match the proper deduction method with the correct expenditures. -Political contributions

Chelsea operates an illegal gambling enterprise out of her restaurant.Considering only the following expenses,what amount can Samantha deduct? Building rent \ 34,000 Secretarial services 12,000 Payments to off-duty policemen to provide security 20,000 Lease payments for cars given to health inspectors 18,000