Chapter 3

Question 1

Schedule C

Answer 1

Profit or loss From Business for Sole Proprietorship

Question 2

Schedule C is filed by

Answer 2

self-employed taxpayers

Question 3

Schedule E

Answer 3

rental and royalty income

Question 4

Schedule F

Answer 4

farm and ranch income

Question 5

“Trade or Business”

Answer 5

any activity engaged in for profit

Intermittent activities (e.g., casual craft sales) or leisure pursuits (e.g., wine making) do not always rise to the level of a trade or business and may require reporting under the hobby loss rules

Question 6

The Ordinary and Necessary Test

Answer 6

the expense is commonly found in the specific business, and is helpful and appropriate in running the business

Question 7

The Business Purpose Test

Answer 7

Expenses must have a legitimate business purpose to be considered deductible

Question 8

The Reasonableness Test

Answer 8

The tax law requires that deductions be reasonable (not extravagent) to be deducted.

Question 9

Cannot Deduct

Answer 9

Personal, living, and family expenses

Capital expenditures

Expenses related to tax-exempt income

Expenditures related to the sale of illegal drugs

Illegal bribes and kickbacks

Fines, penalties, and other payments to governments related to the violation of law

Lobbying and political expenditures

Settlement or attorney fees related to sexual abuse or harassment if subject to a non-disclosure agreement

Question 10

Schedule C requires the taxpayer to provide

Answer 10

a principal business or professional activity code

Question 11

Schedule C

Answer 11

Comes right off the income statement

lists income, expenses & COGS

Question 12

Self Employment Tax

Answer 12

calculated on 1040
equivalent to 2x FICA + addl. Medicare where applicable.

Cap of 132900 for 12.4 %
No cap for 2.9%

Question 13

Inventory

Answer 13

the stock of goods or materials that a business holds for the purpose of resale to generate a profit

Question 14

COGS

Answer 14

is a tax deduction

Question 15

Inventory Valuation Methods

Answer 15

FIFO
LIFO
W/A
SPID

Question 16

Form 970

Answer 16

Declares a business’ Inventory Costing Method (can only be changed with IRS Permission

Question 17

Transportation Deductions

Answer 17

Plane, Rail, Bus, Operating & Maintaining an Automobile

But NOT Commuting

Question 18

Commuting Deductions

Answer 18

Only if:

• Outside the Metro Area where worker normally works
• Commuting to a temporary work location
• Commuting to a regular office if you normally work at home

Question 19

Hauling Deduction

Answer 19

Hauling tools & instruments in your personal vehicle or a rented trailer/truck is deductible

Question 20

Mileage Deduction

Answer 20

Actual cost or standard (.58/mi)

Question 21

Standard Mileage deduction does not include

Answer 21

Fuel
OIl
Insurance
Repairs
Maintenance
Depreciation

Question 22

To use Standard Mileage deduction one must:

Answer 22

own or lease the vehicle

not operate a fleet (5+)

not claim depreciation (other than straight line)

not have claimed section 179 (expense election)

Question 23

Actual Mileage Cost

Answer 23

% of miles driven for business X cost (FOIRMD)

Question 24

Travel expenses

Answer 24

ordinary and necessary expenses incurred in traveling away from home, overnight, in pursuit of the taxpayer’s trade or business

Question 25

Deductible Travel Expenses

Answer 25

50% meals
lodging 
taxes
tips
laundry

Question 26

A tax home is

Answer 26

the taxpayer’s principal place of business or employment

Question 27

Temporary Assignment Deductions

Answer 27

apply only if not practical to return home or attendance is required.

If it lasts over 1 year, it is no longer temporary, and any reimbursements are considered income.

Question 28

Combined Business/Pleasure trips

Answer 28

Only business expenses are deductible

-travel to and from
for business (unless mostly personal)
- business lodging
-business meals