ACCT 218 | Chapter 3 | Review

Bonita earns $31,000 from her job, and she has $1,000 of interest income. She has itemized deductions and personal exemptions of $35,000. There are no casualty or theft losses in the itemized deductions. What is Bonita's net operating loss for the current year?

$0 Note: The Net Operating Loss (NOL) provision provides taxpayers with relief due to the inequities of the progressive rates involved in the tax calculation.

If a taxpayer has beginning inventory of $25,000, purchases of $175,000, and ending inventory of $45,000, what is the amount of the cost of goods sold for the current year?

$155,000 $25,000 + $175,000 - $45,000 = $155,000 Note: The cost of inventory a taxpayer owns has a significant impact on the taxable income of the taxpayer. The deduction for the cost of goods sold of a retail business is a direct function of the amount of the beginning and ending inventories.

Carol maintains an office in her home where she conducts a dressmaking business. During the year she collects $4,000 from sales, pays $1,300 for various materials and supplies, and properly allocates $2,500 of rent expense and $500 of her utilities expense to the use of her home office. What amount of the rent and utilities expense may Carol deduct in the current year in computing her net income or loss from the dressmaking business?

$2,700 $4,000 - $1,300 = $2,700 Note: Some taxpayers operate a trade or business in their homes and qualify for home office deductions. The tax law imposes strict limits on the availability of the deduction. In fact, the deduction for an office in the home is allowed by exception.

Under the high-low method, the federal per diem amount given in the text for 2015 for a high-cost locality for travel in the United States is:

$259 per day Note: Instead of requiring actual expense records, small business employers who reimburse employees for travel expenses can choose a per diem method of substantiation. The primary advantage of using a per diem method to substantiate expenses is that it eliminates much of the record keeping usually associated with travel expenses.

Loren loaned a friend $9,000 as financing for a new business venture. In the current year, Loren's friend declares bankruptcy and the debt is considered totally worthless. What amount may Loren deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?

$3,000 short-term capital loss Note: Bad debts fall into two categories, business bad debts and nonbusiness bad debts. Debts that arise from the taxpayer's trade or business are classified as business bad debts, while all other debts are considered nonbusiness bad debts.

Jim has a net operating loss in 2015. If he does not make any special elections, what is the first year to which Jim carries the net operating loss?

2013 Note: Taxpayers are required to carry back NOLs first and then carried forward unless an irrevocable election to forgo the carry back (up to two years).

Which of the following taxpayers may not deduct their continuing education expense?

A CPA who attends a course to review for the real estate agents' exam. Note: Taxpayers may deduct educational expenses if specified conditions are met.

Which of the following expenses incurred while the taxpayer is away from home "overnight" is not included as a travel expense?

Business gifts Note: Travel expenses are defined as ordinary and necessary expenses incurred in traveling away from home in pursuit of the taxpayer's trade or business.

Which of the following employees are most likely permitted to deduct the cost of their uniform?

A cheerleader for the San Diego Chargers football team who purchases her own costume. Note: Employees and self-employed individuals are allowed a deduction for the costs of special work clothing or uniforms. To be deductible, the clothing or uniforms must satisfy two criteria. 1. be required as a condition of employment 2. not be suitable for everyday use

Which of the following business gifts are fully deductible?

A gift to an employee, for 10 years of continued service, costing $250. Note: Within limits, taxpayers are allowed a deduction for business gifts. Total of $25 per year.

Which of the following taxpayers is entitled to a travel expense deduction?

A manager of a chain of department stores who works in the main store 3 weeks out of every month and visits distant branch locations on overnight trips during the remainder of the month. Note: Travel expenses are defined as ordinary and necessary expenses incurred in traveling away from home in pursuit of the taxpayer's trade or business.

Which of the following factors is not considered by the IRS in determining whether an activity is a hobby?

All of these choices are considered to determine if an activity is a hobby. -Whether the activity is conducted like a business. -The time and effort expended by the taxpayer. -Whether there has been changes in the methods of operation in an attempt to improve profitability. -Income and loss history of the activity. Note: If a taxpayer enters into an activity without this, the tax law limits the amount of tax deductions available.

Which of the following is not deductible by the taxpayer?

All of these choices are deductible. -A subscription to The CPA Journal by a CPA. -A subscription to The Yale Medical Journal by a doctor. -A subscription to Financial Management by a chief financial officer. -A subscription to The Harvard Law Review by a lawyer. Note: Doctors, lawyers, accountants, engineers, teachers, and other professionals engaged in practice or employed may deduct certain expenses.

Which of the following taxpayers qualifies for a home office deduction?

An accounting student who maintains a home office used exclusively to prepare tax returns. Note: The federal rule for a home office deduction states that a taxpayer will not be allowed a deduction for the use of a dwelling unit used by the taxpayer as a residence. The law provides four exceptions to the general rule under which a deduction may be allowed.

Which of the following taxpayers may use the standard mileage method of calculating transportation costs?

An attorney who uses his Porsche for calling on clients. Note: Taxpayers may deduct the actual expenses of transportation, or they may be entitled to use a standard mileage rate to calculate their deduction for transportation costs. To use the standard mileage method, the taxpayer must satisfy these four requirements

Which of the following formulas represent the proper method of calculating cost of goods sold?

Beginning Inventory + Purchases - Ending Inventory Note: The deduction for the cost of goods sold of a retail business is a direct function of the amount of the beginning and ending inventories.

Daniel is a self-employed consultant. Until this year he was always an employee. He comes to discuss his new business with you. As his tax accountant, you should:

Discuss all of these choices: -Discuss setting up a good record-keeping system for his new business. -Discuss the substantiation requirements for meals and entertainment. -Discuss the self-employment tax, as well as the income tax, on business earnings in order to help Daniel estimate what he might owe in taxes for the year. -Discuss the rules for deducting automobile expenses. Note: The term trade or business is not formally defined, although the term is used often in the Internal Revenue Code. When you are self-employed, the burden to show that expenses qualify falls to the individual.

Kathy is a self-employed taxpayer working exclusively from her home office. Before the home office deduction, Kathy has $3,000 of net income. Her allocable home office expenses are $5,000 in total (includes $2,000 of allocated interest and property taxes). How are the home office expenses treated on her current year tax return?

Only $3,000 of home office expenses may be deducted, resulting in net business income of zero. The extra $2,000 of home office expenses may be carried forward and deducted in a future year against home office income. Note: Some taxpayers operate a trade or business in their homes and qualify for home office deductions. The tax law imposes strict limits on the availability of the deduction. In fact, the deduction for an office in the home is allowed by exception. Book: Chapter 3 "Office In The Home" Page 3-24

What form does a self-employed sole proprietor usually use to report income and expenses from business?

Schedule C Note: This form is one of the most commonly used tax forms and, for many taxpayers, the net income reported on this form is the primary component of their adjusted gross income. This form is similar to the income statement in financial accounting.

In the current year, Mary started a profitable housekeeping business as a sole proprietor. She has 10 housekeepers working for her and spends her time selling their services and coordinating her employees' time. Mary made $50,000 in her first year of operations. In addition to filing a Schedule C to report her business earnings, Mary must also file:

Schedule SE Note: Taxpayers that are self-employed file this form to calculate their Social Security and Medicare tax.

Which of the following expenses is deductible as an entertainment expense?

The cost of a cocktail party for clients paid for by a computer salesman at a computer fair Note: Self-employed taxpayers are allowed deductions for 50% of the cost of meals and entertainment incurred in connection with their trade or business. To obtain a deduction, certain conditions must be satisfied.

Joe is a self-employed information technology consultant from San Francisco, CA. He takes a trip to Chicago primarily for business. He takes 2 personal days to go to museums and see the sights of Chicago. How should he treat the expenses related to this trip?

The cost of all of the airfare and the business days should be deducted, while the cost of the personal days are not deductible. Note: Travel expenses are defined as ordinary and necessary expenses incurred in traveling away from home in pursuit of the taxpayer's trade or business.