Exam 5: Introduction to Business Expenses

Discuss whether the following expenditures meet the ordinary, necessary, and reasonable requirements for deductibility. a.Mortimer owns a shoe store. Every August Mortimer has a "Back-to-School" sale. To promote that event Mortimer spends $2,000 on newspaper and radio advertising. Generally, this event generates about $85,000 in sales. These sales revenues are about twice the level of sales in other months. b.Wilma bought a small manufacturing business that had been declared bankrupt. To retain the current sales force, she pays some of the obligations owed to these people by the former owners. Wilma has no legal obligation to pay these debts. c.Ned owns a large sporting goods store. Nick's 17-year-old son, Tony, works in the store when time permits. Nick pays Tony $10 per hour because he has worked in the store several years. Other high school age individuals also work at the store and perform functions requiring less experience than Tony. They are paid $8 per hour. d.Art is a self-employed CPA. Last month he attended an AICPA Continuing Education course that cost him $750. In addition to the course registration fee, Art incurred $800 in travel expenses to attend the course. e.Elvira is a stockholder in over 100 different corporations. However, she does not own more than 10 shares of stock in any one company. She enjoys attending annual stockholder meetings and often gives her "two cents worth" about issues affecting the companies' operations. In the past year Elvira spent $7,540 to attend the stockholder meetings to help protect her investments.

Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds.

Match each statement with the correct term below. -Production-of-income expense

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. He will have to include the $1,000 in income but will not get any benefit from the expenses.

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

For a taxpayer to be engaged in a trade or business, the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Match each statement with the correct term below. -Home office deduction

Marlene is a single taxpayer with an adjusted gross income of $140,000. In addition to her personal residence, Marlene owns a ski cabin in Vail. She uses the cabin for 40 days during the current year and rents it out to unrelated parties for 80 days, receiving rent of $10,000. Marlene's costs before any allocation related to the cabin are as follows: ? Mortgage interest and property taxes \ 9,000 Utilities, maintenance, and repairs 4,500 Depreciation 6,000 Based on the above information, what is her allowable depreciation deduction?

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

Which of the following production of income expenses would be deductible: I.Interest expense on loan to acquire U.S. Treasury notes. II.Interest expense on loan to acquire IBM Corporate bonds. ​

Mike and Pam own a cabin near Teluride, Colorado. In the current year the cabin was rented for 8 days to friends. Mike and Pam used the cabin a total of 82 days during the same year. After allocating the expenses between personal and rental use, the following rental loss was determined: ? Rental income \ 700 Property taxes (250) Mortgage interest (300) Repairs and maintenance (100) Utilities (150) Rental loss \ (100) How should Mike and Pam report the rental income and expenses for last year?

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

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

Match the proper deduction method with the correct expenditures. -Betterment

Pamela owns the building where her plumbing supply business is located. This year she put on vinyl siding to replace the weathered wood siding on her building. The cost of the new siding can be expensed in the current year.

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.. ​

Match the proper deduction method with the correct expenditures. -Fire and casualty insurance premium on business warehouse

Amy borrowed $25,000 for her business from a local bank two years ago. To increase her deductions for 2018, she pays December interest of $400 and prepays January and February interest totaling $800 on December 30, 2018. The maturity date of the note is November 30, 2019. How much of the interest that she paid in December is deductible in 2018? I.If she is a cash-basis taxpayer, Amy's interest deduction is $1,200. II.If she is an accrual-basis taxpayer, Amy's interest deduction is $400. ​

Which of the following requirements does not have to be met for a business or investment expense to be deductible:

Tom and RoseMary own a cabin near Stowe, Vermont. During the current year the cabin is rented for 31 days for $1,800. Tom and RoseMary used the cabin a total of 12 days during the year. After making the appropriate allocation of expenses between personal and rental use, the following rental loss was determined: ? Rental income \ 1700 Property taxes (150) Mortgage interest (950) Repairs and maintenance (400) Utilities (300) Depreciation (200) Rental loss \ (300) How should Tom and RoseMary report the rental income and expenses for the current year?