Question 1

In order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

Accepted Answer

A) True 
 B)False

Question 2

In order for a taxpayer to reduce taxable income with a deduction, the tax law must allow it, and it must meet all statutory requirements.

Accepted Answer

A) True 
 B)False

Question 3

Angel owns a gourmet Mexican restaurant. His head chef, Carmen, is arrested for a parole violation. Because Angel needs Carmen back to work as soon as possible, Angel pays her bail of $250, attorney's fees of $300, and a court fine of $200.
I.A business purpose exists for the payments.
II.If Carmen were required to repay the expenditures, it would constitute a loan and not be deductible for Angel.
III.If Angel does not require Carmen to repay the amounts paid on Carmen's behalf, the payments constitute compensation and Angel gets a deduction for the expenses paid.
​

Accepted Answer

A) Only statement I is correct. 
B) Statements I and III are correct. 
C) Statements I and II are correct. 
D) Statements I, II and III are correct. 
A) Only statement I is correct. 
B) Statements I and III are correct. 
C) Statements I and II are correct. 
D) Statements I, II and III are correct.

Question 4

In the current year, Paul acquires a car for $16,000. He uses the car in his advertising business and for personal purposes. His records indicate the car is used 60% for business and that the total operating expenses, including depreciation, are $4,700. Paul expects to use the car for 5 years in his business. What amount can Paul deduct as the operating costs of the car?

Accepted Answer

A) $- 0 - 
B) $2,400 
C) $2,820 
D) $4,700 
E) $12,000 
A) $- 0 - 
B) $2,400 
C) $2,820 
D) $4,700 
E) $12,000

Question 5

Match the proper deduction method with the correct expenditures.
-Premiums the insured taxpayer pays for life insurance

Accepted Answer

A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure 
A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure

Question 6

Match the proper deduction method with the correct expenditures.
-Repair-and-maintenance expenditures

Accepted Answer

A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure 
A) Capitalized and amortized over a number of accounting periods 
B) Expensed in the period incurred 
C) Not deductible 
D) Can be capitalized and amortized or deductible depending on the amount of the expenditure

Question 7

Andy lives in New York and rents his house for two weeks during the U.S. Open Tennis tournament for $3,500. He must include the rent in his income.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) Automobile used 75% for business. 
B) Investment interest expense on loan to acquire municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Expenses related to royalty income
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities. 
A) Automobile used 75% for business. 
B) Investment interest expense on loan to acquire municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Expenses related to royalty income
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 9

Christy purchases $1,000-worth of supplies from a local vendor. The supplies are delivered on March 29, 2018. The supplies are fully used up by year end. Because of unusual circumstances, a bill for the supplies arrives from the vendor on January 10, 2019, and is promptly paid. When can Christy deduct the expenses?
I.In 2018, if she is an accrual basis taxpayer.
II.In 2019, if she is a cash basis taxpayer.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 10

Paul owns a lumber yard in Portland. He has decided to expand his business interests and is considering opening a golf course in Seattle. He has incurred $51,000 of expenses investigating whether to open the new golf course. In January of the current year he finds the perfect location and opens the golf course on July 1. What amount of the investigation expenses can he deduct in the current year?

Accepted Answer

A) $- 0 - 
B) $5,100 
C) $5,567 
D) $6,533 
E) $51,000 
A) $- 0 - 
B) $5,100 
C) $5,567 
D) $6,533 
E) $51,000

Question 11

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

Accepted Answer

A) Automobile used 75% for business. 
B) Investment interest expense on loan to acquire municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Expenses related to royalty income
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities. 
A) Automobile used 75% for business. 
B) Investment interest expense on loan to acquire municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Expenses related to royalty income
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Question 12

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is not deductible?

Accepted Answer

A) Expenses related to earning rental income 
B) Expenses related to interest income from municipal bonds. 
C) Legal expenses related to rental real estate property. 
D) Medical expenses of the taxpayer's dependent child. 
A) Expenses related to earning rental income 
B) Expenses related to interest income from municipal bonds. 
C) Legal expenses related to rental real estate property. 
D) Medical expenses of the taxpayer's dependent child.

Question 14

Wilson owns a condominium in Gatlinburg, Tennessee. During the current year, she incurs the following expenses before allocation related to the property:
?
 $$\begin{array} { l r } 
\text { Mortgage interest } & \$ 10,000 \
\text { Property taxes } & 4,000 \
\text { Utilities } & 1,000 \
\text { Maintenance fees } & 1,300 \
\text { Repairs } & 800 \
\text { Depreciation } & 6,000
\end{array}$$ 
a.For each of the following scenarios indicate whether Wilson would treat the condominium for income tax purposes as personal use property, a rental or a vacation home.?? $$\begin{array} { | l | r | r | r | r | } 
\hline \text { Case } & \text { Rental } & \text { Rental } & \text { Personal } & \text { Personal, rental, } \
&\text { Income } & \text { Days } & \text { Use Days } & \text { or vacation } \
\hline \text { A } & \$ 10,000 & 300 & 0 & \
\hline \text { B } & 7,000 & 60 & 10 & \
\hline \text { C } & 15,000 & 60 & 20 & \
\hline \text { D } & 2,000 & 10 & 40 & \
\hline \text { E } & 11,000 & 280 & 20 \
\hline
\end{array}$$ 
b.Consider Case C. Determine Wilson's deductions related to the condominium. Indicate the amount of each expense that can be deducted and how it would be deducted.

Accepted Answer

Wilson can deduct $15,000 in allocated r

Question 15

Elise is a self-employed business consultant who operates her business out of an office in her home. The home office passes the qualifying tests for deducting office in the home expenses. For the current tax year, Elise earns $90,000 from her business activities. She incurs $82,000 in supplies, travel expenses, wage expense, etc. Elise's mortgage interest and real estate taxes allocable to the home office space were determined to be $9,000. Also, other expenses including insurance, repairs and maintenance, utilities, and depreciation allocable to the home office space total $11,000. How much of the other expenses (insurance, repairs, etc.) can Elise deduct?

Accepted Answer

A) $- 0 - 
B) $2,000 
C) $8,000 
D) $9,000 
E) $11,000 
A) $- 0 - 
B) $2,000 
C) $8,000 
D) $9,000 
E) $11,000

Question 16

Electronic City sells various electronic products. With each of its products, Electronic City offers customers the option of purchasing a repair contract. Under the contracts, Electronic City will make repairs anytime during the term of the contract. Electronic City estimates that repair costs related to this year's sales will be $39,000. During the current year, Electronic City incurs repair costs of $37,000 related to prior year's contracts and $4,000 on contracts sold this year.
I.If Electronic City accounts for the contracts using the accrual method of accounting, its repair cost deduction is $39,000.
II.If Electronic City accounts for the contracts using the cash method of accounting, its repair cost deduction is $41,000.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 17

Claire and Harry own a house on Hilton Head Island. During the year, Claire and Harry rent the house for 30 days to friends from Texas for $2,000. Claire and Harry use the house a total of 60 days during the year. After making the appropriate allocation of expenses between personal and rental use, the following rental loss was determined:
?
$$\begin{array} { l r } 
\text { Rental income } & \$ 2,000 \
\text { Property taxes } & ( 250 ) \
\text { Mortgage interest } & ( 950 ) \
\text { Repairs and maintenance } & ( 200 ) \
\text { Utilities } & ( 300 ) \
\text { Depreciation } & ( 400 ) \
\text { Rental loss } & \$ ( 100 )
\end{array}$$
How should Claire and Harry report the rental income and expenses for the forthcoming year?
I.Report the $100 loss for AGI.II.Only expenses up to the amount of $2,000 rental income may be deducted for the year.
III.Include the $2,000 in gross income, but no deductions are allowed.
IV.Nothing needs to be reported.
?

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Statements II and III are correct. 
D) Statements III and IV are correct. 
E) Statements I and III are correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Statements II and III are correct. 
D) Statements III and IV are correct. 
E) Statements I and III are correct.

Question 18

Which of the following payments are currently deductible?
I.Steve is a self-employed attorney. He pays another attorney $14,000 to represent him in a lawsuit that alleged that he was liable in a personal auto accident.
II.Connie has an investment portfolio in excess of $600,000. She pays Chris $1,000 to do an analysis of her investments and make recommendations on restructuring the portfolio.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct. 
A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 19

Virginia, a practicing CPA, receives $11,000 from the sale of rare orchids that she grows. Her expenses of operating this hobby activity follow:
?
$\begin{array}{lr}
\text { Property taxes on the structures } & \$ 4,500 \
\text { Seeds, fertilizer, and bug sprays. } & 8,000 \
\text { Depreciation on the structures } & 5,000
\end{array}$ 
How much of the expenses that Virginia incurs can be deducted by her?

Accepted Answer

A) $- 0 - 
B) $4,500 
C) $11,000 
D) $12,500 
E) $17,500 
A) $- 0 - 
B) $4,500 
C) $11,000 
D) $12,500 
E) $17,500

Question 20

Safina is a high school teacher. She has set aside one room in her home exclusively as a home office where she grades papers, prepares for class, etc. No revenues are generated from her activities. Depreciation and maintenance are $800 on the home office space. How much of the expenses are deductible by Safina?

Accepted Answer

A) $- 0 - 
B) $200 
C) $400 
D) $500 
E) $800 
A) $- 0 - 
B) $200 
C) $400 
D) $500 
E) $800

In order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

In order for a taxpayer to reduce taxable income with a deduction, the tax law must allow it, and it must meet all statutory requirements.

Match the proper deduction method with the correct expenditures. -Premiums the insured taxpayer pays for life insurance

Match the proper deduction method with the correct expenditures. -Repair-and-maintenance expenditures

Andy lives in New York and rents his house for two weeks during the U.S. Open Tennis tournament for $3,500. He must include the rent in his income.

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

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

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

Which of the following is not deductible?

Federal Income Taxation-An Overview

Income Tax Concepts

Income Sources

Income Exclusions

Business Expenses

Losses-Deductions and Limitations

Taxation of Individuals

Acquisitions of Property

Cost Recovery on Property: Depreciation, Depletion, and Amortization

Property Dispositions

Non-Recognition Transactions

Choice of Business Entity-General Tax and Nontax Factorsformation

Choice of Business Entity-Operations and Distributions

Choice of Business Entity-Other Considerations

Tax Research

Filters

Exam 5: Introduction to Business Expenses

In order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

In order for a taxpayer to reduce taxable income with a deduction, the tax law must allow it, and it must meet all statutory requirements.

Match the proper deduction method with the correct expenditures. -Premiums the insured taxpayer pays for life insurance

Match the proper deduction method with the correct expenditures. -Repair-and-maintenance expenditures

Andy lives in New York and rents his house for two weeks during the U.S. Open Tennis tournament for $3,500. He must include the rent in his income.

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

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

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

Which of the following is not deductible?

Federal Income Taxation-An Overview

Income Tax Concepts

Income Sources

Income Exclusions

Business Expenses

Losses-Deductions and Limitations

Taxation of Individuals

Acquisitions of Property

Cost Recovery on Property: Depreciation, Depletion, and Amortization

Property Dispositions

Non-Recognition Transactions

Choice of Business Entity-General Tax and Nontax Factorsformation

Choice of Business Entity-Operations and Distributions

Choice of Business Entity-Other Considerations

Tax Research

Filters