Chapter 9 Flashcards
Holly took a prospective client to dinner at a restaurant, and after agreeing to a business deal, they went to the theater. Holly paid $290 for the meal and separately paid $250 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?
$145
The cost of entertainment is not deductible. The cost of business meals is 50% deductible ($290 × 50% = $145).
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?
Airfare to New Jersey $ 2,000
Meals purchased at the conference 220
Meal with an old friend 120
Lodging in New Jersey 450
Rental car 180
$2,740
$2,000 + ($220 × 0.50) + $450 + $180 = $2,740.
Which of the following is a true statement?
a) Lodging and incidental expenditures are fully deductible if the taxpayer is away from home overnight while traveling on business.
b) Meals are deductible for an employee who is forced to work during the lunch hour.
c) When a taxpayer travels solely for business purposes, only half of the costs of travel are deductible.
d) If travel has both business and personal aspects, the cost of transportation is deductible but the deductibility of lodging depends upon whether business is conducted that day.
e) None of the choices are true because business travel is not deductible.
a) Lodging and incidental expenditures are fully deductible if the taxpayer is away from home overnight while traveling on business.
When the travel has both business and personal aspects, the deductibility of the transportation costs depends upon whether business is the primary purpose for the trip. Lodging and incidental expenditures are fully deductible if the taxpayer is away from home overnight while traveling on business. Meals are only 50% deductible
Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct?
$1,000 in airfare to repair investment rental property in Colorado. Primary purpose is business.
$500 in meals at restaurants while attending a medical convention in New York.
$300 for tuition for an investment seminar, “How to pick stocks.”
$100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day.
$1,250 “for AGI”
The investment seminar and entertainment are not deductible, and 50 percent of the meal cost is deductible [$1,000 airfare + ($500 × 50% = $250 meals) = $1,250 total deduction].
George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million. Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation. What is the business interest limitation that George will be subject to this year if the business does not qualify under the gross income test?
$447,000
($1,250,000 + $240,000) × 30% = $447,000. Note that George can only deduct the interest that was actually paid of $240,000.
The business interest limitation is based on which of the following:
a) business interest income plus 30 percent of adjusted taxable income.
b) 30 percent of business revenue after deducting depreciation and interest expense.
c) debt invested in the business.
d) interest income after adding back 30 percent of all deductible expenses.
e) None of the choices are correct.
a) business interest income plus 30 percent of adjusted taxable income.
The business interest limit is based on interest income plus 30 percent of adjusted taxable income. Adjusted taxable income is allocable taxable income computed without regard to interest income or expensenet operating losses, and the qualified business income (QBI) deduction under Section 199A.
Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000, and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley’s casualty loss deduction?
$4,600
Adjusted basis less insurance reimbursement ($5,800 − $1,200).
Bill operates a proprietorship using the cash method of accounting, and this year he received the following:
$100 in cash from a customer for services rendered this year
a promise from a customer to pay $200 for services rendered this year
tickets to a football game worth $250 as payment for services performed last year
a check for $170 for services rendered this year that Bill forgot to cash
How much income should Bill realize on Schedule C?
$520
Income is realized as property is received, but the promise to pay is not property ($100 + $250 + $170 = $520).
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?
In December of last year
The income is earned when the all-events test is satisfied on the earliest of the date that the service is provided, the service is billed, or the payment is received.
Which of the following types of expenditures is not subject to capitalization under the uniform cost capitalization (UNICAP) rules?
a) selling expenditures
b) cost of manufacturing labor
c) compensation of managers who supervise production
d) cost of raw materials
e) all the choices are subject to capitalization under the UNICAP rules
a) selling expenditures
Selling, advertising, and research expenditures are not subject to UNICAP.
Mike started a calendar-year business on September 1stSeptember 1st of this year by paying 12 months of 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?
$12,000 under the cash method and $4,000 under the accrual method
Mike can deduct 12 months of rent under the cash method by applying the 12-month rule, whereas only four months of rent will accrue because economic performance occurs ratably.
Brad operates a storage business on the accrual method. On July 1, Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance cover the next 12 months. What is Brad’s deduction for the rent and insurance?
$24,000 for the rent and $18,000 for the insurance
Economic performance occurs for the rent ratably over time, so only $24,000 is accrued ($2,000 per month). Insurance is a payment liability and accrues only as paid. However, since the payment spans two periods (six months this year and six months next year), the portion benefiting the future period would typically be capitalized. In this case, the duration of the contract does not exceed 12 months and the payment does not extend beyond the end of next year. So, the 12-month rule allows for the deduction of $18,000. Note that the 12-month rule cannot apply to the rent until economic performance occurs, and this only happens ratably.
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?
$19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year.
This is the definition of a recurring item—not material in amount (or better matching), expected to recur in the future, and paid before the earlier of eight and a half months or the time the tax return is filed.
Manley operates a law practice on the accrual method and calendar year. At the beginning of the year, Manley’s firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley’s deduction for bad debt expense this year?
$20,000
The $23,000 recorded as bad debt expense for financial accounting purposes would have increased the allowance account; however, since the allowance increased $3,000, actual write-offs were $20,000.
Which of the following is a true statement about accounting for business activities?
a) An overall accounting method can only be adopted with the permission of the commissioner.
b) An overall accounting method is initially adopted on the first return filed for the business.
c) The cash method can only be adopted by individual taxpayers.
d) The accrual method can only be adopted by corporate taxpayers.
e) None of the choices are true.
b) An overall accounting method is initially adopted on the first return filed for the business.
An overall accounting method (cash or accrual) is initially adopted with the first return filed for the business.
