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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 1

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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 (before considering any miscellaneous itemized deduction limitations) ? Alrfare to New Jer'sey                                                $2,000 Meals                                                                            220 Lodging in New Jersey                                                  450 Rental car                                                                      180

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

F) B) and E)
G) D) and E)

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Question 2

True/False

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

A) True
B) False

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Question 3

Multiple Choice

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

Uniform capitalization of indirect inventory costs is required for most large taxpayers.

Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes.This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes.At year end,Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers.What amount of the rebates,if any,can Big Homes 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?

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

The domestic production activities deduction is a deduction for the incremental cost of manufacturing tangible assets in the United States.

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

Don operates a taxi business,and this year one of his taxis was damaged in a traffic accident.The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident.The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost.What is the amount of Don's casualty loss deduction?

Beth operates a plumbing firm.In August of last year she signed a contract to provide plumbing services for a renovation.Beth began the work that August and finished the work in December of last year.However,Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full.When should Beth recognize income under the accrual method of accounting?

Kip started a wholesale store this year selling bulk peanut butter.In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000.In July Kip purchased three tubs for a total cost of $6,000.Finally,in November Kip bought two tubs for a total cost of $1,000.Kip sold six tubs by year end.What is Kip's ending inventory under the FIFO cost-flow method?

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?

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

Werner is the president and CEO of Acme,Inc.and this year he took a prospective client to dinner.During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters.After dinner the CEO took the client to a football game and no business was discussed.The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game.What is the deductible amount of these expenses?

According to the Internal Revenue Code §162,deductible trade or business expenses must be one of the following?

Rock Island Corporation generated taxable income (before the domestic production activities deduction)of $10 million this year.The total income included $4,500,000 of qualified production activities income.The company paid $500,000 in W-2 wages to generate the qualified production activity income.What is Rock Island's domestic production activities deduction for the year?

Which of the following is a true statement?

Mike started a calendar year business on September 1ˢᵗ of this year by paying 12 months rent on his shop at $1,000 per month.What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?