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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 21

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Taxpayers must maintain written contemporaneous records of business purpose when traveling in order to claim a deduction for the expenditures.

A) True
B) False

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Question 22

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Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year, Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: What amount of travel expenditures can Sam deduct?

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Question 23

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Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $1 million this year. Taxable income was computed on $50 million of revenues and included $50,000 of interest income. The company paid $450,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time at year-end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year-end but prior to filing his tax return. Which of the following is a true statement?

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year, a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

Danny owns an electronics outlet in Dallas. This year, he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights' lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year, Todd made $423,500 of sales on account, and $65,400 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

Which of the following types of transactions may not be accounted for using the cash method for small proprietorships?

Danny owns an electronics outlet in Dallas. This year, he paid $690 to register for a four-day course in management in Chicago. Danny paid $710 in airfare and $640 for five nights' lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $320 a day for meals, and $260 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below) . What amount can Shelley deduct?

George operates a business that in 2020 generated revenues of $50 million and allocable taxable income of $680,000. Included in the computation of allocable taxable income were$906,000 of business interest expense, $26,000 of business interest income, and $899,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Which of the following is a payment liability?

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1^st of this year, Mike received $20,400 for four outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next four summers, beginning this year. How much income must Mike recognize in each of the next four years if he is attempting to minimize his tax burden?

George operates a business that generated revenues of $60 million and allocable taxable income of $1.35 million. Included in the computation of allocable taxable income were deductible expenses of $245,000 of business interest and $255,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Jim operates his business on the accrual method, and this year, he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1.6 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $1,100,000 for a one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

Which of the following is a true statement?

The deduction for business interest expense is limited in 2020 to the sum of (1) business interest income and (2) 40 percent of the adjusted taxable income of the taxpayer for the taxable year.

Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job. The summer job usually pays about $17,500, but Bryon paid Fred $29,000 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.