Question 1

In which of the following independent situations is the taxpayer entitled to deduct expenses related to the home office?
I.A real estate agent employed by a local real estate agency owns several rental properties.She regularly and exclusively uses a second bedroom in her home solely as an office for bookkeeping and other activities related to management of the rental properties.She has no other place to perform these functions.
II.An attorney employed by a large law firm frequently brings work home from the office.She uses a study in her home for doing this work as well as managing her investment 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.

Question 2

Generally income tax accounting methods are designed to result in
I.a proper matching of expenses to the revenues being generated.
II.a denial of a current deduction for costs that will not have to be paid in the near future.

Accepted Answer

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

Question 3

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include
I.Personal expenses.
II.Trade or business expenses.
III.Expenses for the production of income.

Accepted Answer

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

Question 4

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

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

Question 5

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.

Accepted Answer

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

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Michelle is a bank president and a weekend artist.She regularly sells her paintings at flea markets and spends an average of 9 hours a week painting or selling.Although she made about $6,000 last year from sales of artwork,she tells her friends she would do it for free.For the current tax year,she incurs expenses of $800 primarily for admission fees to flee markets and art fairs.The $800 is
I.deductible for AGI as a business expense.
II.a miscellaneous itemized deduction.
III.is deductible only because she has revenue from the activity.

Accepted Answer

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

Question 8

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

Question 9

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

Accepted Answer

A) Specifically disallowed. 
B) Appropriate and helpful. 
C) Considered a trade or business. 
D) Not considered a trade or business. 
E) Problems with this generally arise with related parties.
F)This is met when services or property are provided to the taxpayer.
G)Normal, common, and accepted but not necessarily regularly recurring.
H)This is met when the existence and the amount of a liability have been established.

Question 10

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

Accepted Answer

A) Automobile used 75% for business. 
B) Investment expenses on municipal bonds. 
C) Cost of investigating a new trade or business that the taxpayer enters. 
D) Can be separated into two classifications. 
E) Safety-deposit box for taxable investments.
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 11

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.

Accepted Answer

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

Question 12

Several factors are used to determine whether an activity is classified as a hobby or as a business.Which of the following are factors that aid in this determination?
I.The financial status of the taxpayer
II.The expectation that the assets involved in the activity will increase in value.
III.The taxpayer's success in similar activities.
IV.The amount of personal pleasure and enjoyment that accrues to the taxpayer.

Accepted Answer

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

Question 13

Cornelius owns a condominium in Orlando.During the year,Cornelius uses the condo a total of 25 days.The condo is also rented to vacationers for a total of 75 days and generates rental income of $9,000.Cornelius incurs the following expenses:
 $$\begin{array} { l r } 
\text { Mortgage interest } & \$ 4,000 \
\text { Property taxes } & 1,800 \
\text { Utilities } & 2,000 \
\text { Insurance } & 1,200 \
\text { Depreciation } & 10,000
\end{array}$$ 
Determine Cornelius's deduction related to the condominium.Indicate the amount of each expense that can be deducted and how it would be deducted.

Accepted Answer

The answer of Cornelius owns a condominium in Orlando.During the...

Question 14

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

Accepted Answer

A) True 
 B)False

Question 15

Tom,Dick,and Harry operate Quality Stores.Based on advice from Tom's sister,a CPA,the three form a partnership.Tom owns 50%; Dick and Harry each own 25%.For the year,Quality Stores reports the following:
$\begin{array}{lr}
\text { Sales revenues } & \$ 800,000 \
\text { Business expenses } & (440,000) \
\text { Investment expenses } & (4,000) \
\text { Short-term capital gains } & 26,000 \
\text { Long-term capital losses } & (14,000) \
\text { Taxable income } & \$ 368,000
\end{array}$
By how much will Tom's adjusted gross income increase because of the above?

Accepted Answer

A) $178,000 
B) $180,000 
C) $183,000 
D) $184,000 
E) $186,000

Question 16

Match the proper deduction method with the correct expenditures.
-Covenant not to compete for 4 years

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

Question 17

Janine,a cash-basis taxpayer,borrowed $15,000 for her business from a local bank three years ago.To increase her deductions for 2013,she pays December interest of $150 and prepays January and February interest totaling $300.The maturity date of the note is November 30,2014.How much of the interest is deductible in 2013?

Accepted Answer

A) $ -0- 
B) $ 150 
C) $ 300 
D) $ 450

Question 18

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

Accepted Answer

A) a broker. 
B) an active trader. 
C) an active investor. 
D) a securities' dealer.

Question 19

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.

Accepted Answer

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

Question 20

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

Exam 5: Introduction to Business Expenses

Generally income tax accounting methods are designed to result in I.a proper matching of expenses to the revenues being generated. II.a denial of a current deduction for costs that will not have to be paid in the near future.

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include I.Personal expenses. II.Trade or business expenses. III.Expenses for the production of income.

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

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.

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

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

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

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

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

Match the proper deduction method with the correct expenditures. -Covenant not to compete for 4 years

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

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