Exam 5: Introduction to Business Expenses

Match each statement with the correct term below. -Vacation home 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. ​

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. ​

Match the proper deduction method with the correct expenditures. -Illegal gambling operation expenses

Michael operates an illegal cock fighting business. Which of the following expenses is currently deductible?

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. ​

Income tax accounting methods and financial accounting methods differ in many ways. Which of the following tax law provisions are likely to create permanent differences between taxable income and financial (or book) income of an entity? I.The cost of certain property is allowed to be deducted in the year of acquisition rather than through regular depreciation methods. II.Tax depreciation is computed over a statutory life rather than the asset's useful life. ​

For its financial accounting records Addison Company uses the allowance method to account for bad debts and estimates the balance in the "Allowance for Bad Debts" account using the aging method. For tax purposes, the allowance method cannot be used. The rationale for not allowing this method is

Due to a shortage of cash, East Coast Entertainment Company, an accrual basis taxpayer, could not pay its November 2018 utility bill on time. In February of 2019, East Coast Entertainment pays the utility bill. I.East Coast can deduct the expense on either its 2018 or 2019 tax return. II.East Coast cannot deduct the utility expense in 2018 because it is paid in 2019. ​

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.If Sadie itemizes her deductions she will not receive any tax benefit from the hobby expenses. IV.If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses. ​

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

Which of the following expenditures or losses incurred in the context of a trade or business activity is deductible at the time it is incurred?

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. ​

An ordinary expense I.is an expense commonly incurred in an income-producing activity. II.is an expenditure that provides future benefits to an income-producing activity. ​

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

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

Sheila extensively buys and sells securities. The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore, Shelia must be

Davis owns and operates a convenience store on the north side of the city. He has always wanted to operate a sports bar. When he hears of a new shopping center development in the south part of the city, he contacts the developer and begins negotiations to open his dream enterprise. I.If negotiations are successful and Davis incurs $40,000 in start-up costs to open his new business, he can deduct up to $5,000 of the start-up costs and must capitalize the costs of investigation and start-up exceeding $5,000. II.If Davis decides not to open his bar and restaurant, the investigation expenses are fully deductible. ​

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. ​

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