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Chapter 5???Introduction to Business Expenses 1. Tina, Terri, and Tricia operate Capstone Fashions an exclusive boutique. e. $140,000 2. To be deductible, the dominant motive for incurring an expense must be d. the intent to earn a profit. 3. Which of the following is an example of a business purpose as dominant motive? b. Only statement II is correct. 4. The Business Purpose Concept means c. Both statements are correct. 5. The legislative grace concept dictates that business expenses are grouped into certain categories that include d. Statements II and III is correct. 6.
A reference to a business expense means c. Both statements are correct. 7. A reference to a business expense means c. Both statements are correct. 8. Sheila extensively buys and sells securities c. an active investor. 9. Sherry extensively buys and sells securities b. an active trader. 10. Which of the following is/are trade or business expenses? b. Only statement II 11. Which of the following is/are trade or business expenses? b. Only statement II is correct. I. |John incurs legal expenses related to real estate he leases to Bucko Burger Hamburger Haven for a parking lot.
The lease is renegotiated annually. John does nothing other than sign the lease after his attorneys have approved it. | II. |Susan owns several rental apartments. She arranges for repairs and maintenance, pays for the expenses related to the property, and handles all leasing activities. | 12. Which of the following people is currently engaged in a trade or business? b. Only statement II is correct. I. |Roger spends 8 hours a day 3 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, interest, and long-term gains from holding investments for appreciation in value. | II. |Jennifer is a realtor and she owns a house that she rents to Barry and his family for $450 a month. Jennifer provides for the repairs and maintenance of the house, and she stops by monthly to collect the rent and see how things are going. | 13. Which of the following people are currently engaged in a trade or business? I. |James devotes 45 hours per week to betting on horse 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. | II. |Daryl owns 214 home sites in and around Miami, Florida. He bought these vacant lots several years ago in hoping that they would appreciate in value so he could sell them at a profit. Because of the recreational activities in the area, the building lots are worth 10 times his original cost. He is getting the lots ready to sell this year. | a. |Only statement I is correct. | 14. Which of the following is/are (an) investment activity (activities)? a. Only statement I I. |A farming activity: Liz owns a farm near Vidalia, Georgia.
She leases the property to Cal, who operates the farm for himself. Liz receives 10% of Cal’s revenues as part of the lease agreement but has no responsibilities for the farming operation. | II. |A warehouse ownership activity: Susan owns a warehouse located in mid-town Chicago. She paid $2,500,000 for the real estate several years ago. It is now appraised at over $10,000,000, but she still uses the building only to store excess inventory for her Michigan Avenue Boutique. | 15. Louise, a schoolteacher in Duluth, d. Neither statement is correct. 16. Bonnie’s sister, Diane, wants to open a restaurant. d. Statements II and IV are correct. 7. Leslie owns 2 rental properties. c. Both statements are correct. 18. Pete owns 5 rental properties. a. Only statement I is correct. 19. In the current year, Paul acquires a car for b. $ 3,525 20. During 2009, Martha sells her car for a. $1,680 gain 21. Charlotte traveled to Annapolis c. $ 880 22. Three requirements must be met in order to deduct a trade or business expense. e. Statements I, III, and IV are correct. 23. An ordinary expense c. Both statements are correct. 24. An ordinary expense a. Only statement I is correct. 25. Which of the following is not a required test for the deduction of a business expense? . |Be personal in nature. | 26. Ann CPA operates a financial and d. reasonable. 27. Which of the following payments are currently deductible? I. |Sweeney Corporation purchases a grinding machine costing $40,000. | 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. | d. |Neither statement is correct. | 28. 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 had failed to adequately represent his client. II. |Connie has an investment portfolio in excess of $450,000. She pays Chris $350 to do an analysis of her investments and make recommendations on restructuring the portfolio. | c. |Both statements are correct. | 29. Which of the following is a currently deductible trade or business expense. c. |$25,000 fee paid to a TV station to advertise a new product. | 30. 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. | d. |Neither statement is correct. | 31.
Which of the following is/are currently deductible trade or business expenses? I. |Personal property taxes on business office equipment. | II. |Interest paid on the mortgage payable on a business warehouse. | c. |Both statements are correct. | 32. Which of the following requirements does not have to be met for a business or investment expense to be deductible: c. Be recurring. 33. Which of the following is not deductible? b. |Expenses related to interest income from municipal bonds. | 34. Donna buys a new Escalade c. it is a capital expenditure. 35. Dale owns a gourmet Italian restaurant d.
Statements I, II and III are correct. 36. Which of the following expenditures are not deductible because they are personal in nature? I. |Premiums paid on life insurance for the taxpayer. | II. |Education costs that improves the taxpayer’s skills in his/her trade or business. | a. |Only statement I is correct. | 37. Which of the following expenditures are not deductible because they are personal in nature? I. |Legal costs to obtain a divorce. | II. |Losses resulting from the sale of personal residences. | c. |Both statements are correct. | 38. Lynne bought 1,500 shares c. $6,625 39.
Susan owns and operates a restaurant on the north side e. $10,400 40. Winifred owns and operates d. $ 5,180 41. Davis owns and operates a convenience store on the north. a. Only statement I is correct. I. |If negotiations are successful and Davis incurs $40,000 in start-up cost 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. | || 42. Josh owns a hardware store d. $ 5,117 3. Paul owns a lumber yard d. $ 5,567 44. Jackie recently retired from the U. S. Coast b. Only statement II is correct. 45. Which of the following can be deducted as a trade or business expense? d. |Rent paid on a office to run an illegal gambling operation. | 46. Ben drives a taxi on weekends d. |The costs are not deductible because they are due to violations of law. | 47. Which of the following expenditures or losses incurred in the context of a trade or business activity is deductible at the time it is incurred? c. |Charlie spends $1,350 to have advertising brochures for his business printed.
Charlie later determines that his old business address and phone number were printed on them so he had to throw them away and have them reprinted. | 48. Bruce operates an illegal drug business. d. Cost of drugs sold. 49. Heidi operates an illegal brothel. Which of the following expenses is currently deductible? c. |Rent expense on the enterprise’s building. | 50. Samantha operates c. $56,000 51. Which of the following expenses is/are deductible? I. |Transportation and lodging expenses of $3,000 to influence state legislation that may affect the taxpayer’s business. | II. |A $3,000 political contribution. | d. Neither statement is correct. | 52. Which of the following expenses is/are deductible? I. |Transportation and lodging expenses of $3,000 incurred to monitor state legislation that may affect the taxpayer’s business. | II. |Lobby expenses of $300 during the year to influence local town legislators to support pro-business legislation. | c. |Both statements are correct. | 53. Which of the following payments are deductible? I. |Wilcox pays $1,000 to run an add in the program of the state Independent Party convention| II. |Wilcox is in the construction business. In January, he sends his chief financial officer to Washington, D. C. to monitor current legislation affecting the real estate industry. Expenses totaled $2,100. | III. |In March, Wilcox personally travels to Washington, D. C. , to testify before the banking subcommittee on the effects of proposed legislation on the construction industry. Expenses totaled $2,300. | b. |Only statement II is correct. | 54. Which of the following production of income expenses would be deductible: I. |Interest expense to acquire City of Indianapolis bonds. | II. |Interest expense to acquire IBM Corporate bonds. | b. |Only statement II iS correct. | 55. Matthew incurs d. $3,500 56. Wesley pays a financial d. 2,800 57. Sandra pays the following b. $ 6,000 How much of the above expenditures may Sandra use in computing her itemized deductions? 58. During the current year, Paul came down with a serious illness. c. Only statement III is 59. Ginger operates an activity that qualifies as a hobby. e. Statements II, III, and IV are 60. 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. | e. |Statements I, II, III, and IV are correct. | 61. Which of the following factors absolutely must be present for an activity to be considered a trade or business for tax purposes? d. |Taxpayer has a genuine profit motive for engaging in the activity. | 62. Which of the following factors are used to aid in determining whether an activity that earns income is profit motivated and should be treated as a business or is subject to the hobby loss rules? I. |The amounts of occasional profits, if any. | II. Taxpayer’s success in similar activities. | c. |Both statements are correct. | 63. Which of the following factors are used to aid in determining whether an activity that earns income is profit motivated and should be treated as a business or is subject to the hobby loss rules? I. |The taxpayer’s financial status. | II. |Elements of personal pleasure derived from the activity. | c. |Both statements are correct. | 64. Connie, a practicing CPA, d. $15,000 65. Gordon paints landscape portraits, d. Include $3,800 in gross income and deduct nothing for AGI. 66. Carmen is a bank president d. Statements II and III are correct. 7. Wendy and Vic own a cabin near Reno, Nevada e. No reporting for the rental activity is necessary. 68. Sally and Paul own a cabin near Stowe, Vermont. b. Report the $200 loss for AGI. 69. Claire and Harry own a house on Hilton Head Island . b. Only statement II is correct. 70. Marlene is a single taxpayer with an adjusted gross income b. $1,000 71. Larry and Trish own a cabin near Boise c. Statements I, II and III are correct. 72. Tony rents his vacation home for 30 days c. $1,250 loss 73. Ted owns a condominium in Athens . b. $ 4,980 74. Karen owns a vacation home in Nashville, Indiana. . |report no income and deduct no rental expenses related to the vacation home. | 75. Karl is a single taxpayer with an adjusted gross What is the correct reporting of the rental income and expenses? d. |Statements II and III are correct. | 76. Helena is a self-employed business consultant a. $ – 0 – 77. Eddie is a self-employed architect who maintains a qualifying office in his home c. |$ 8,000| 78. Jim operates a business out of his home. c. Both statements are correct. 79. In which of the following independent situations is the taxpayer entitled to deduct expenses related to the home office? a.
Only statement I is correct. 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 paying bills, sorting coupons and conducting other personal activities. | 80. Patty is a high school teacher a. |$- 0 -| 1. 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. |Only statement I is correct. | 82. Generally income tax accounting methods are designed to result in I. |a tax based on the amount of money 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. | c. |Both statements are correct. | 83. Generally income tax accounting methods are designed to result in b.
Only statement II 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. | 84. William, a single taxpayer, I. |If his itemized deductions total $8,450 in 2008, William includes $500 in gross income for 2009| II. |If he did not itemize his deductions in 2008, none of the refund is included in 2009 gross income. | c. |Both statements are correct. | 85. Jenny, an individual cash basis taxpayer e. $6,500 86. Harold, a cash basis taxpayer, borrows b. $ 200 87. Amy b.
Only statement II is correct. I. |If she is a cash-basis taxpayer, Amy’s interest deduction is $1,200. | II. |If she is an accrual-basis taxpayer, Amy’s interest deduction is $400. | 88. Leslie, a cash-basis taxpayer, borrowed b. $ 150 89. Electronic City sells various electronic products. b. Only statement II is correct. 90. Sara purchases c. Both statements are correct. 91. Brendan purchases c. Both statements are correct. 92. 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? . |A cash basis taxpayer will not be required to use the accrual basis method of accounting in any of the above circumstances. | 93. The all-events test requires that I. |The services have been provided to the taxpayer. | II. |The amount of a liability is determined with reasonable accuracy. | b. |Only statement II is correct. | 94. If someone provides a taxpayer with either property or services, economic performance occurs when b. The property or services are actually provided. 95. Taste-Rite Corporation is an accrual basis taxpayer. b. Only statement II is correct. I. If Taste-Rite is an accrual basis taxpayer it can deduct $12,000. | II. |If Taste-Rite is a cash basis taxpayer it can deduct $10,600. | 96. 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. | e. |Statements I, II, III, and IV are correct. 97. If a taxpayer owes interest, economic performance occurs a. Only statement I is 98. Angela is an accrual basis taxpayer. e. |$4,800| 99. An exception to the economic performance test allows the deduction of year-end accruals if I. |The liability exists and the amount of the liability can be reasonably estimated. | II. |Economic performance occurs within the shorter of 8 1/2 months after the close of the tax year or a reasonable time after the close of the tax year| c. |Both statements are correct. | 100. An exception to the economic performance test allows the deduction of year-end accruals if I. Either the expense is not material for both tax and financial purposes or the accrual results in a better matching of revenue and expenses. | II. |The taxpayer consistently treats the item as incurred in the year the all events test is met. | c. Both statements are correct. 101. Due to a shortage of cash, East Coast Entertainment Company I. |East Coast can deduct the expense on either its 2009 or 2010 tax return. | II. |East Coast cannot deduct the utility expense in 2009 because it is paid in 2010. | d. |Neither statement is correct. | 102. Indicate which of the following statements is/are correct: I. A cash basis taxpayer who gives a creditor his note payable in payment of a claim may deduct the related expense. | II. |When a cash basis taxpayer uses a credit card to pay for an expense it cannot deduct the expense until the credit card bill is paid. | d. |Neither statement is correct. | 103. Indicate which of the following statements is/are correct: I. |A cash basis taxpayer may deduct prepaid rent if it will be used-up within one year of prepayment and the payment is required to be made. | II. |An accrual basis taxpayer must satisfy an all-events test and an economic performance test to claim a deduction. c. |Both statements are correct. | 104. Barry, a cash basis taxpayer, d. 2010 2010 105. Andre is a 90% owner of American Commercial Construction d. |Neither statement is correct. | 106. For its financial accounting records Smarten Company uses the allowance b. |The all-events test has not been met. | 107. 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 a single entity? . |Both statements are correct. | 108. 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 a single 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 predefined statutory life rather than the asset’s useful life. | d. |Neither statement is correct. |