Exam 5: Introduction to Business Expenses

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.is not deductible. III.is deductible only because she has revenue from the activity. ​

A business expense includes I.an expenditure that satisfies the dominant profit-motive requirement. II.an expenditure that is incurred in a trade or business activity. ​

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

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

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

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

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

Match each statement with the correct term below. -All-events Test

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. ​

Match the proper deduction method with the correct expenditures. -Federal lobbying expenditures

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 amounts of occasional profits, if any. II.Taxpayer's success in similar activities. ​

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. ​

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. ​

An ordinary expense I.is normal, common, and accepted under the circumstances of the business community. II.is an expense commonly incurred in an income-producing activity. ​

Three requirements must be met in order to deduct a trade or business expense. Also, deductible trade or business expenses may not be which of the following: I.a capital expenditure. II.reasonable in amount. III.a payment that frustrates public policy. IV.an expense related to tax-exempt income. ​

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

Jenny, an individual cash basis taxpayer, has $6,000 of state income taxes withheld from her salary during 2018. When she filed her 2017 state income tax return during April 2018, she paid an additional $500 in state income taxes. When she filed her 2018 state income tax return in April 2019, she received a $200 refund. What is her state income tax deduction for 2018 for federal income tax purposes?

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

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 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. ​