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Exam 8: Business Income, Deductions, and Accounting Methods

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Question 31

Multiple Choice

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Which of the following is likely to be a fully deductible business expense?

A) Salaries in excess of the industry average paid to attract talented employees.
B) The cost of employee uniforms that can be adapted to ordinary personal wear.
C) A speeding fine paid by a trucker who was delivering a rush order.
D) The cost of a three-year subscription to a business publication.
E) None of these is likely to be deductible.

F) A) and E)
G) A) and C)

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Question 32

Multiple Choice

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Shelley is employed in Texas and recently attended a two-day business conference in New Jersey. Shelley spent the entire time at the conference and documented her expenditures (described below) . What amount can Shelley deduct as an employee business expense? $\ \text{Airfare to New Jersey}\quad\quad\quad\quad\quad\quad\quad\$2,000$ $\ \text{Meals}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad220$ $\ \text{Lodging in New Jersey}\quad\quad\quad\quad\quad\quad\quad450$ $\ \text{Rental car}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad480$

A) $2,850
B) $2,740
C) $1,850 if Shelley's AGI is $50,000
D) All of these are deductible if Shelley is reimbursed under an accountable plan.
E) None of the expenses are deductible - only employers can deduct travel expenses.

F) None of the above
G) C) and E)

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Question 33

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Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

Qualified production activity income for calculating the domestic production activities deduction is limited to taxable income for a business or modified AGI for an individual.

Joe is a self employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business and 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. Which of the following is a true statement?

Which of the following is a true statement about accounting for business activities?

The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

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?

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

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic production activities deduction) . Included in income was $70,000 of qualified production activities income. George paid $60,000 of wages to employees engaged in domestic manufacturing. What domestic production activities deduction will George be eligible to claim this year?

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

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?

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1st of this year Anne paid $2,280 of interest on a loan. The interest accrues evenly over 19 months ($120 per month) from June 1st of this year through December 31st of next year. In addition, on September 1st Anne also paid $2,700 for 18 months of professional liability insurance ($150 per month). What amount of interest and insurance can Anne deduct this year?

Otto operates a bakery and is on the cash method and calendar year. This year one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire. Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage. What is Otto's casualty loss deduction?