Exam 5: Introduction to Business Expenses

Generally income tax accounting methods are designed to result in I.a tax based on the amount of cash available in the current period to pay taxes. II.a denial of a current deduction for costs that will not have to be paid in the near future. ​

In which of the following circumstances would a cash basis taxpayer be required to account for an item of income or deduction under the accrual method of accounting?

Harold, a cash basis taxpayer, borrows $65,000 for his business on a 2-year note from First City Bank on December 1, 2018. 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 2018?

Henry owns a hardware store in Indianapolis. He has decided to expand his business interests and is considering opening a golf store in a neighboring town. He has incurred $12,000 of expenses investigating whether to open the new golf store. In July of the current year he finds the perfect location and opens the golf store on October 1. What amount of the investigation expenses can he deduct in the current year?

Match the proper deduction method with the correct expenditures. -Organization costs

Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year a.Janet pays $900 in interest on debt she incurred to purchase municipal bonds. The bonds pay $1,500 of interest in the current year. b.Andrew owns a retail-clothing store. Andrew has the opportunity to obtain a franchise to operate a discount sporting goods store. He spends $5,000 investigating the possibility of opening a sporting goods store in a neighboring town. c.Jane owns a fitness center. She employs the star basketball player at Local University as an aerobics instructor. Because of his reputation, she pays him $20 an hour. Jane pays her other aerobics instructors $10 an hour. d.Alvin makes a vacation trip to Florida, and while there spends two days investigating the feasibility of opening up a new office of his optometry practice.

John decides rather than work late in the office, he does all of his work in an office at home. His employer approves of this arrangement. Since John uses his home office on a regular and exclusive basis, he will be eligible to take a home office deduction even though it was not required as a condition of employment.

Chelsea operates an illegal gambling enterprise out of her restaurant. Considering only the following expenses, what amount can Chelsea deduct? ? Buil ding 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

Jackie recently retired from the U.S. Coast Guard after 30 years of service. She would like to open a boat shop to operate in her retirement years. Jackie incurs $3,800 of expenses while investigating sites for her shop and while checking out boat franchises. What are the tax effects of the expenses Jackie incurs? I.If Jackie enters the boat business, she can deduct the costs only by capitalizing them and amortizing them over 180 months. II.They are not deductible if Jackie does not enter the ski and boat business. ​

Girardo owns a condominium in Key West. During the year, Girardo uses the condo a total of 22 days. The condo is also rented to vacationers for a total of 78 days and generates rental income of $24,000. Girardo incurs the following expenses before allocation: ? Mortgage interest \ 8,000 Property taxes 3,600 Utilities 4,000 Insurance 2,400 Depreciation 22,000 The amount of depreciation that Girardo may deduct with respect to the rental property is

All of the following are a required test for the deduction of a business expense except?

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?

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

Bowen is planning to quit his job as a plumber and open a paint store. He has incurred expenses of $8,000 dealing with the opening of the store and will be able to deduct all of these expenses.

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.

Which of the following is/are currently deductible trade or business expenses? I.Membership dues to an environmental lobbying group. II.Cost of acquiring a new business automobile. ​

Which of the following is/are trade or business expenses? I.Mahlon incurs expenses related to investing in stocks and bonds. Mahlon is a Sociology professor at State University but spends 10-15 hours per week on his investments. Almost 2/3 of Mahlon's annual income comes from his investments as dividends and interest. II.Shaheen has expenses related to managing her portfolio of securities. The short-term trading of her securities generates most of her annual income. She has no other job. ​

Marian, a schoolteacher in Duluth, Minnesota, owns a rental house in Scottsdale, Arizona. She travels to Arizona during spring break to inspect her property and discuss property improvements with the tenant and property manager. Marian's brother, Brian, lives in Scottsdale. She stays at his house during her week in Arizona and borrows his car to travel across town for her day of meetings. Her trip accomplishes several objectives: a visit with her brother, a trip away from Minnesota's winter weather, and a review of her investment property. The expenses of traveling to Scottsdale I.have a dominant business purpose. II.are deductible as expenses for the production of income. ​

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.

An expense that is incurred for the production of rent will be deducted for adjusted gross income.