Exam 5: Introduction to Business Expenses

Janine, a cash-basis taxpayer, borrowed $15,000 for her business from a local bank three years ago. To increase her deductions for 2018, she pays December interest of $150 and prepays January and February interest totaling $300. The maturity date of the note is November 30, 2019. How much of the interest is deductible in 2018?

Harold is a 90% owner of National Homes Construction, an accrual basis S corporation. On December 30, 2017, National Homes accrues a $100,000 bonus to Harold, payable on February 15, 2018. I.If Harold is an accrual basis taxpayer, National Homes deducts the bonus in 2017 and Harold reports the income in 2018. II.If Harold is a cash basis taxpayer, National Homes deducts the bonus in 2017 and Harold reports the income in 2018. ​

Which of the following payments are currently deductible? I.Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller. II.Amber's Construction Company pays the tuition for Karl's son. Karl is a local building inspector and has no other relationship with the company. ​

Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year. a.Antonio is the owner of a restaurant. His business has been growing, and Antonio determines that he needed to add more seating capacity. He builds a patio garden section onto the back of the restaurant at a cost of $70,000. b.Tina owns a construction company. Because she is behind schedule on a project, she pays a city building inspector $500 to get him to come out and do his inspection a week before he had scheduled the inspection. c.Claude is a graduate of State University and an avid supporter of the school's athletic program. During the summer he employed State's star running back in his pool cleaning business. He paid the football player $15 an hour, although other employees doing similar work are only paid $10 per hour. d.Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city this year, she spent $20,000 advertising the new store. Even though this is much more than she typically spends on advertising, she felt that it was reasonable because the new coffeehouse has the potential to be a very profitable venture for many years.

During 2017, Myca sells her car for $5,000. She acquired the car in 2013 for $11,000 and has used it 60% for business and 40% for personal use. She deducted $5,280 in depreciation. What is the taxable gain or loss from the sale of the car attributable to her business use?

Which of the following is a currently deductible trade or business expense.

Richard, a cash basis taxpayer, is an 80% owner and president of WLFI TV. WLFI TV is an S corporation and uses the accrual method of accounting. On December 1, 2018, WLFI TV accrues a bonus of $50,000 to Richard. The bonus is payable on January 31, 2019. In what year does Richard report the income and WLFI TV take the deduction? Richard WLFI TV

Which of the following is an example of a business purpose as dominant motive? I.Darren is a full-time plumber and a part-time Amway salesman. He is taking his family to Disney World and plans to take his Amway products with him so that he may deduct most of his cost of the trip. II.Larry is a full-time plumber. He is taking his family with him to a convention in Orlando featuring the latest in plumbing products and techniques. He plans to deduct most of his cost of the trip. ​

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: ? Rental income \ 14,000 Mortgage interest and property taxes (3,200) Utilities, maintenance, and repairs (6,000) Depreciation (8,000) Rental loss \ (3,200) 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. ?

Dustin, Dan, and Dennis operate Heritage Hills dry cleaners as an S corporation. Dustin owns 50% of the business, Dan 30%, and Dennis 20%. For the current year, Heritage Hills reports the following: How must Heritage Hills report its results to each of the owners? Sales revenues \ 400,000 Trade and business expenses (185,000) Charitable contributions (5,000) Short-term capital losses (4,000) Long-term capital gains 12,000 Taxable income \ 218,000

An accrual basis taxpayer may deduct expenses in the year in which certain tests are met. These tests include I.when services or property are provided to the taxpayer or when the taxpayer uses the property. II.when the "all-events test" is met. III.when "economic performance" has occurred. IV.when all events have occurred to determine that a liability exists and the amount of the liability can be determined with reasonable accuracy. ​

Mario paints landscape portraits, and he treats the activity as a hobby. During the current year, Mario incurred the following expenses while earning $2,500 from sales of paintings: ? Paints and supplies \ 2,200 Utiliti es expenses for his studio 1,000 Advertising 300 Insurance on his studio and equipment 700 Mario uses the standard deduction and never itemizes his deductions. How should Mario report all of the items related to his hobby on his tax return?

Which of the following is/are trade or business expenses? I.Solly incurs legal expenses related to real estate he leases to Bucko Burger Hamburger Haven for a parking lot. Solly does little but negotiate the lease every year.. II.Susan owns several rental apartments. She negotiates new rental contracts, arranges for repairs and maintenance, and handles all leasing activities. ​

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. ​

Generally income tax accounting methods are designed to result in I.a proper application of the wherewithal-to-pay concept. II.a proper matching of expenses to the revenues being generated. ​

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. ​

Karen owns a vacation home in Door County, Wisconsin. During the year, she rents it out for two weeks and uses it personally for three weeks. Her expenses directly related to renting out the property were utilities $300, and maid service $150. The portion of taxes allocable to the rental activity is $600 and revenue from the rental is $1,000. Karen will

Bonnie's sister, Diane, wants to open a restaurant. Because Diane is short of funds, Bonnie purchases the building and leases it to Diane. No agreement is signed, and Bonnie tells Diane not to worry about paying rent until the cash flow can support it. Also, Bonnie promises not to sell the property to anyone other than Diane. I.Any expenditures Bonnie makes regarding the building would be classified as production of income expenses. II.The building rental has the characteristics of a gift. III.The dominant motive in acquiring the building is to earn an economic benefit (profit). IV.Bonnie's property tax expenses related to the property are deductible. ​

Match each statement with the correct term below. -Economic Performance

Which of the following people is currently engaged in a trade or business? I.Barry spends 4 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 income from dividends and long-term gains from holding investments for appreciation in value. II.Jennifer is a full-time realtor, and she owns a house that she rents to Barry and his family for $900 a month. Jennifer provides for the repairs and maintenance of the house, and she stops by monthly to collect the rent and visit with Barry and his family. ​