M3 Gross Income: Part 2 Flashcards
MCQ-08457
Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan’s business enabled Nan to prepay the first three years of interest attributable to the note on December 31 of the
current year. How should Nan treat the prepayment of interest for tax purposes?
Deduct the current year’s interest and amortize the balance over the next two years
Interest paid in advance by a cash basis taxpayer on business loans cannot be deducted until the tax period to which the interest relates. In other words, the interest must be both
paid and incurred in order to be deducted.
MCQ-14909
A real estate broker reported the following business income and expenses for the current year:
Commission income: $100,000
Expenses: $0
Auto rentals: $2,000
Referral fees to other brokers (legal under state law): $20,000
Referral fees to non-brokers (illegal under state law): $8,000
Parking fines: $200
What amount should be reported as net profit on Schedule C, Profit or Loss from Business?
$78,000
The taxpayer’s Schedule C net profit is $78,000.
The taxpayer may deduct ordinary and necessary business expenses, which include the auto rentals and referral fees to other brokers that are legal under state law. The illegal referral fees to non-brokers and parking fines are nondeductible.
Commission income $100,000
Auto rentals: ($2,000)
Referral fees to other brokers: ($20,000)
Schedule C net profit: $78,000
MCQ-01603
On December 1, Year 1, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, Year 2. Michaels paid the entire interest of $12,000 on December 1, Year 1. What amount of interest was deductible on Michaels’ Year 2 income tax return?
$11,000
Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers. The loan is for 1 month in Year 1 and 11 months in Year 2. Therefore, 1/12 of the interest is deductible in Year 1 and 11/12, or $11,000 is deductible in Year 2.
MCQ-01609
Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle’s office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction?
$550
The $200 cash received plus the $350 fair value of the bookcase received must be included in income by Perle, for a total of $550. The income is based on the value in money or fair value of property received by Perle, not the $600 billed.
MCQ-02146
On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30 of the current year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What amount of interest was deductible on Michaels’ current year income tax return?
$11,000
Michaels may deduct $11,000 on her current year return.
Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers.
Term of loan = 12 months (December 1, prior year − November 30, current year)
Interest paid − $12,000 on December 1 of the prior year.
Allocated interest per month = $12,000 ÷ 12 = $1,000/month
Interest deductible in current year = $1,000 × 11 = $11,000
MCQ-14691
Ben Flood, attorney at law, is a sole proprietor and files Schedule C with his federal Form 1040.
Which of the following is not a deductible expense on Schedule C?
Health insurance for him and his family.
Generally, personal expenses are not allowed as deductions on the Schedule C. Schedule C items should be only those related to the operation of the business itself. Health insurance for himself and his family is an adjustment to arrive at adjusted gross income because he is self-employed.
Dr. Merry, a self-employed dentist, incurred the following expenses:
Investment expenses: $700
Custodial fees for Dr. Merry’s self-employed retirement plan: $40
Work uniforms for Dr. Merry and Dr. Merry’s employees: $320
Subscriptions for periodicals used in the waiting room: $110
Dental education seminar: $1,300
What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business?
$1,730
Business expenses include work uniforms for the taxpayer and taxpayer’s employees, subscriptions for periodicals for patient use, and continuing education expenses.
MCQ-02170
On December 1 of the current year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest’s current year income tax return?
$2,000
$2,000 of interest is deductible on her current year tax return.
Total interest: $24,000
Divide by # of months of the loan ÷ 12
Monthly deduction: $2,000
Times: Months in current year × 1
Total current year deduction: $2,000
Prepaid interest must be allocated over the period of the loan, even for a cash basis taxpayer.
MCQ-01472
Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker attended a five-day seminar on Spanish business practices that cost $700. Baker’s round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per
day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount of total expense can Baker deduct on Form 1040 Schedule C, “Profit or Loss From Business,” related to this situation?
$1,200
Baker can deduct $1,200 in total expense on Form 1040 Schedule C, calculated as follows:
Direct educational expenses: $700 [cost of the course]
Daily expenses for 5-day seminar: $500 [$100 per day × 5]
Total educational expenses: $1,200
Rule: If foreign travel is primarily personal in nature (e.g., a vacation), none of the travel expenses (e.g., round-trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country.
MCQ-01479
On December 1 of the current taxable year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of
interest was deductible on Krest’s current year income tax return?
$2,000
Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December
1, of the current year, only the interest relating to December of the current year can be deducted in the current year. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month.
MCQ-04859
Tom and Sharlene had the following items of income and expense during the taxable year:
Self-Employment Activity below:
Gross income $35,000
Business license fees $500
Marketing Expenses $2,000
Salary paid to Sharlene $10,000
Tom’s wages from his Job $67,000
Interest from money market $1,500
Gain from sale of securities owned for 3 months $15,000
What is Tom & Sharlene’s gross income before adjustments?
$116,000
Tom & Sharlene’s gross income is calculated as follows:
Net self-employment income: $32,500
Tom’s wages: $67,000
Interest: $1,500
Gain from sale: $15,000
Total gross Income: $116,000
Note: Sharlene’s salary is not included as income as 100% of the net self-employment activity is taxable to her. Her salary is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.
MCQ-05903
Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the
shop had a taxable income of $60,000. Assuming that Juan had no other employment-related
earnings:
Juan must pay self-employment tax on the earnings of the business
Earnings from self-employment are subject to the income tax as well as federal self-employment tax. Thus, Juan must pay self-employment tax on the earnings of the business.
MCQ-15643
Which of the following is subject to the Uniform Capitalization Rules of Code Sec. 263A?
Warehousing costs incurred by a manufacturing company with $32 million in annual gross receipts
Uniform capitalization rules apply to the following: (1) real or tangible personal property produced by the taxpayer for use in his or her trade or business; (2) real or tangible personal property produced by the taxpayer for sale to his or her customers; and (3) real or tangible personal property acquired by the taxpayer for resale, provided the taxpayer’s annual average gross receipts for the preceding three years exceeds $27 million (2022). Warehousing costs incurred by a manufacturing company (making inventory for sale to its customers) are subject to the Uniform Capitalization Rules. Further, they are the only item on the list that is real or tangible personal property.
MCQ-15644
The Uniform Capitalization Rules of IRC Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount?
$27,000,000
The uniform capitalization rules do not apply if the taxpayer’s average gross receipts for the preceding three tax years do not exceed $27,000,000 (2022).
Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods manufactured by the taxpayer?
Research
Uniform Capitalization rules provide guidelines with respect to capitalizing or expensing certain costs. With regard to inventory, direct materials, direct labor, and factory overhead
should be capitalized as part of the cost of inventory. Warehousing costs, quality control, and taxes, excluding income taxes, are all considered factory overhead items. The research should be expensed.
