Ch 9 SB
On December 1 of the current year, Rhianna pays $2,400 for a 12-month advertising contract that will begin on March 1 of next year. Rhianna uses the cash method of accounting for her business. How much will Rhianna be able to deduct in the current year?
0 Since the contract extends beyond the end of the following year and the effective date doesn't start until March, she can't deduct anything in the current year.
Lesa drives her car approximately 18,000 miles per year. During the most recent year, she drove 7,000 miles commuting to and from work, 4,500 miles for business-related conferences and client visits, and 6,500 miles for personal trips. How many miles are considered business miles and can be used to determine the tax deduction for transportation expenses?
4,500 Commuting to work is generally considered a personal expense and is not deductible.
Which of the following statements is INCORRECT regarding the requirements to meet the economic performance test under the various ways a liability can arise? 1. When a business prepays on a lease or rental agreement, the deduction is allocated over the rental period. 2. When a business agrees to pay another party for services, the deduction is taken as the other party provides the services. 3. When a business agrees to provide services to another party, the expenses incurred are deducted as the service is provided or costs incurred. 4. Certain liabilities, such as rebates, refunds, and workers compensation payments, can be deducted when incurred regardless of when payment is made.
4. Certain liabilities, such as rebates, refunds, and workers compensation payments, can be deducted when incurred regardless of when payment is made.
Which of the following choices is INCORRECT when defining the gross income of a business? 1. Gross income from a business includes gross profit from inventory sales. 2. Revenues from renting property is included in gross profit for rental businesses. 3. Gross income for a service business can be calculated as income from services provided. 4. Gross income for a business may be calculated as sales less returns and discounts.
4. Gross income for a business may be calculated as sales less returns and discounts.
The all-events test generally requires businesses receiving advance payments for services to recognize the income when they receive the payment, rather than when they perform the service. Which of the following statements is INCORRECT regarding this rule? 1. This rule holds for prepayment of interest or rent. 2. The IRS provides an exception that allows the recognition of the advance payment of services to be deferred to the tax year following the prepayment. 3. For financial accounting, the prepayment is recorded as a liability and not recognized as income until the service is performed. 4. The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned.
4. The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned.
Due to the personal enjoyment element involved with meals, taxpayers may only deduct _______% of the actual cost.
50
Chester and Co.'s tax reporting year end is on the last Friday in June every year. This year end schedule is known as which of the following?
A 52/53 week year end
What are the rules concerning reporting periods for tax purposes?
Business must report their income and deductions for a full 12 month year, unless special circumstances apply.
Which of the following statements is correct when describing the accounting methods used for tax versus financial reporting?
Businesses have an incentive to maximize financial reporting income, but minimize taxable income.
Which of the following choices are tests that need to be met in order to deduct an expense under the accrual method?
Economic performance test All-events test
Which of the following statements is correct regarding the deductibility of meals when a taxpayer is traveling for business?
Fifty percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.
In order to defer deductions for manufacturing costs until the finished products are sold, Congress enacted rules specifying that the cost of raw materials, shipping costs, and any other indirect costs of manufacturing must be added to the cost of inventory. What are these rules called?
Uniform cost capitalization rules
What two events must have occurred to meet the all-events test?
When all events have occurred that determine or fix the business's right to receive the income When the amount of the income can be determined with reasonable accuracy
When is a business expense deemed to be reasonable in amount?
When it is not extravagant
A business is deemed to have adopted a permissible accounting method if it has used the method for ____(a)____ year(s), but is not deemed to have adopted an impermissible accounting method unless it has used the method for _____(b)_____ consecutive years.
a. 1 b. 2
The tax laws do not allow a(n) ____(A)_____-method business to deduct accrued expenses for a liability owed to a related party using the ____(B)_____-method until the related party recognizes the related income from the transaction.
a. accrual b. cash
Businesses using the accrual method of accounting generally recognize income when they meet the ____(a)_____-____(b)____ test.
a. all b. events
For accrual-method businesses, bad debt expense is recognized using the __(a)____ method for financial accounting and is deducted using the ___(b)___ method for tax purposes.
a. allowance b. direct write-off
The accounting methods that can be chosen for tax reporting include the ___(a)____ method, the ____(b)_____ method, and the _____(c)_____ method.
a. cash b. accrual c. mixed
Although there are exceptions, a taxpayer or business using the cash method of accounting recognizes revenue when property or services are actually or ____(a)____ received and recognizes deductions when the expense is ___(b)_____.
a. constructively b. paid
In the year that a business changes its accounting method, it must make an adjustment to taxable income that represents the _____(A)____ difference for the amount that would have been taxed or deducted in prior years. If the adjustment increases taxable income, the taxpayer includes ___(B)____% of the addition in the current year. If the adjustment decreases taxable income, the taxpayer includes ____(C)______% of the deduction in the current year.
a. cumulative b. 25 c. 100
The allowance method of recognizing bad debt expense is used for ___(a)_____ reporting, while the direct write-off method is used for _____(b)____ reporting.
a. financial b. tax
A business may have a tax year that is shorter than a full 12 months during its ___(a)___ year in business or its ____(b)___ year in business.
a. first b. final
Accrual methods for tax tend to overstate ____(a)____ and understate _____(b)______ relative to accrual methods for financial accounting.
a. income b. deductions
In reporting financial statement income, businesses have incentives to select accounting methods that accelerate ____(a)____and defer ____(b)____. In reporting taxable income, businesses have incentives to select accounting methods that accelerate ____(c)____ and defer ____(d)____.
a. income b. deductions c. deductions d. income
For financial reporting purposes, an advance payment for services is NOT recorded as a revenue, but rather recorded as a(n) __(A)__. It will be recognized as a revenue when it is earned. For tax reporting purposes, an advance payment is taxed immediately because the payment meets the __(B)__-__(C)__ test. However, there is an exception which allows the prepaid income to be recognized in the __(D)___ following the receipt if certain conditions are met.
a. liability b. all c. events d. year
The objective of business activities is to make a(n) ___(a)_____. When a taxpayer's activity is pursued for personal pleasure, that activity is treated as a(n) ______(b)____ when revenues and expenses are incurred.
a. profit b. hobby
For 2020, taxpayers with average annual gross __(a)__ during the prior 3 years of __(b)__ million dollars are not subject to the business interest deduction limitation.
a. receipts b. 26
Larger businesses that generate a material portion of their income by selling products they acquire for resale or products they manufacture generally must account for gross profit using the ___________ method, regardless of the method used for tax reporting.
accrual
The __________-method of tax reporting provides a better matching of revenues and expenses.
accrual
The ______ method of accounting recognizes revenues when property is received and recognizes deductions when the expense is paid.
cash
Which of the following describes the difference between business activities and hobbies?
Hobbies are not primarily profit-motivated.
Which of the following statements are correct regarding the recognition of the cumulative difference in taxable income due to a change in accounting method?
If the adjustment decreases taxable income, it is recognized in its entirety in the year of the change. If the adjustment increases taxable income, it is recognized over 4 years by adding 25% of the increase each year.
Which of the following choices constitutes gross income from a business?
Income from services provided Income from renting property Gross profit from inventory sales (revenue less business expenses = This calculation results in net income. Gross income for a business includes gross profit. Gross income from a service business includes the service revenue.)
Which of the following business expenses are deductible for tax purposes?
Legal fees incurred to defend the business in a lawsuit Depreciation expense on a building used to store company vehicles Advertising cost for ads placed in the local newspaper
Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses?
Necessary
In order to deduct the business portion of mixed motive expenses, taxpayers must have sufficient __________ to prove the business use of the asset.
documentation, records, evidence, support, record-keeping, substantiation, record, documents, document, or record keeping
In addition to the all-events test, an accrual-basis business must meet a(n) ________ test with respect to a liability before the corresponding expense can be deducted for tax purposes.
economic performance
The term ________ is used to describe an expense that is helpful or conducive to a business activity.
necessary
The term _______ is used to describe an expense that is normal or appropriate for the business under the circumstances.
ordinary
Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses?
ordinary
Ordinary and necessary business expenses are _______ deductible only to the extent they are in amount.
reasonable
Which of the following criteria is NOT required for a business expense to be considered ordinary and necessary?
Repetitive in nature
True or false: In order to deduct travel expenses (as opposed to transportation expenses), the taxpayer must be away from home on a trip of sufficient duration to require sleep or rest.
true The taxpayer must be away from home overnight or long enough to require rest.
Sonny incurred the following expenses last month in his self-employment business: Khaki pants and a blue button-down shirt to wear to work; tuition for a course in marketing to improve his current job skills as a fashion designer; and groceries so that he could take his lunch to work. Which of these expenses is/are deductible business expenses?
tuition for the marketing course
In addition to finished goods, under the _______________ rules, inventory costs include the purchase price of any raw materials, shipping costs, and any indirect costs the business allocates to inventory.
uniform cost capitalization
Allison purchased equipment that cost $100,000 for use in her business. She expects the equipment to be useful for the business for the next 8 years. Which of the following choices correctly describes the tax treatment of the cost of the equipment?
The equipment should be capitalized and depreciated according to the tax code.
How does the accrual method for tax reporting differ from the accrual method for financial reporting?
The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes.
Which of the following choices are advantages to the taxpayer of choosing the cash-method of tax reporting rather than the accrual-method?
There is more flexibility to time the recognition of income and deductions. Bookkeeping is easier.
Which of the following accounting methods is NOT acceptable for tax reporting? 1. Accrual method 2. Hybrid method 3. Credit method 4. Cash method
3. Credit method
Match the entity with the statement that describes the tax treatment of that entity. 1. sole proprietorship 2. partnership 3. C corporation
1. Revenues and expenses are reported directly on the owner's tax return and the profit (or loss) is subject to both individual income and self employment taxes. 2. Entity reports income on tax forms separate tax (information) forms, but the profit or loss flows through to owners' individual income tax returns. 3. Income is taxed at the entity level rather than flowing through to the owner(s).
Which of the following choices is NOT correct regarding deductible transportation expenses for a taxpayer using her personal vehicle for business purposes? 1. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles. 2. The taxpayer can deduct the business portion of the actual costs of operating the vehicle plus depreciation. 3. The taxpayer can deduct a standard mileage rate based on business miles driven. 4. The taxpayer can NOT deduct the costs of commuting from her home to her regular place of business.
1. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles.
Match the business entity with the tax form used to report taxable income. 1. schedule c 2. form 1065 3. form 1120S 4. form 1120
1. sole proprietorship 2. partnership 3. S corporation 4. C corporation
Which of the information listed below is NOT a requirement of the documentation needed to substantiate the business portion of mixed motive expenses? 1. The time and business purpose should be included. 2. The records should be contemporaneous. 3. The records should include written evidence of personal use. 4. The records should include the amount. 5. The records should be written.
3. The records should include written evidence of personal use.
Taxpayers are generally limited to deducting no more than ________ percent of their adjusted taxable income, plus their business interest income, as a business interest deduction.
30
Which of the following criteria is NOT required for a meal to be considered a tax-deductible business meal? 1. The amount must be reasonable under the circumstances. 2. The meal must be eaten on the business premises. 3. The meal must be directly associated with the active conduct of the business. 4. The taxpayer or an employee of the taxpayer must be present for the meal.
2. The meal must be eaten on the business premises.
Alex purchased a personal lawn mower to use for mowing his lawn and the lawns at his rental properties. The depreciation expense for the mower was $300. At the end of the season, he documents that he used the mower 70% for his rental properties and 30% for personal purposes. How much can he deduct as a business expense?
210 Only the business portion is deductible ($300 x .70 = $210).
On December 1 of the current year, Jonathon pays $2,400 for a 12-month advertising contract that begins immediately. If Jonathon uses the cash method of accounting for his business, he will be able to deduct $________ in the current year.
2400
Andrews and Co.'s tax reporting year end is on March 31 every year. This year end schedule is known as which of the following?
A fiscal year end
When is a business deemed to have adopted an impermissible accounting method?
After it has used the method for two consecutive years
Danielle's Diamonds is a jewelry store that is owned and operated as a sole proprietorship by Danielle Dawkins that averages $40 million in gross receipts. Danielle uses the cash method of accounting for tax reporting. Which of the following statements is correct for Danielle's business?
Danielle must use the accrual method for reporting gross profit even though she uses the cash method of accounting for everything else.
Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete a construction project. At the end of the year, Josh owed Michael $700 for work performed during December. Josh paid Michael the $700 on January 2. When will Josh be able to deduct the wage expense and when will Michael have to include the $700 in gross income?
Josh must wait to deduct the expense until Michael includes it in gross income. Michael will include the $700 in the year he receives it. Since Josh and Michael are related parties, Josh must wait to deduct the expense until Michael includes the revenue in gross income.
Which of the following methods are the primary inventory cost-flow methods used for tax purposes?
Specific identification First-in, first-out Last-in, first-out
Evan incurred education-related expenditures related to his self-employment job. Under which of the following circumstances will Evan NOT be allowed to deduct these expenditures as a BUSINESS expense?
The course or courses qualify Evan for a new trade or business.
Which one of the following statements is correct regarding an asset that is used for both business and personal purposes?
The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business.
Which of the following statements are correct regarding the requirements to meet the economic performance test under the various ways a liability can arise?
When a business agrees to pay another party for services, the deduction is taken as the other party provides the services. Certain liabilities, such as rebates, refunds, and workers compensation payments, must be deducted when paid regardless of when the liability arises.
