Chapter 9

reasonable

Ordinary and necessary business expenses are deductible only to the extent they are _____ in amount.

Blank 1: one or 1 Blank 2: two or 2

A business is deemed to have adopted a permissible accounting method if it has used the method for ____ year(s), but is not deemed to have adopted an impermissible accounting method unless it has used the method for _____consecutive years.

Blank 1: first or initial Blank 2: final or last

A business may have a tax year that is shorter than a full 12 months during its ____year in business or its ____year in business.

Blank 1: income, revenue, or revenues Blank 2: deductions, expenses, or expense

Accrual methods for tax tend to overstate ____and understate _____ relative to accrual methods for financial accounting.

$210 Reason: The business portion is deductible ($300 x .70 = $210).

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? Multiple choice question. $210 $90 $300 $0

Blank 1: ordinary Blank 2: necessary

All ______and ____expenses that are reasonable in amount and incurred in carrying on a trade or business are deductible for tax purposes.

Blank 1: constructively Blank 2: paid

Although there are exceptions, a taxpayer or business using the cash method of accounting recognizes revenue when property or services are actually or ____received and recognizes deductions when the expense is ____.

A fiscal year end

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? Multiple choice question. A quarterly year end A fiscal year end A calendar year end A 52/53 week year end

Blank 1: accrual Blank 2: direct Blank 3: write Blank 4: off

Business bad debts can only be deducted when the business uses the _______ method of accounting for tax purposes. Only debts determined to be uncollectible under the _____ _____ - _____ method are able to be deducted for tax purposes.

Blank 1: all or fixed Blank 2: events, determinable, or event

Businesses using the accrual method of accounting generally recognize income when they meet the ___ -____ test.

A 52/53 week year end

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? Multiple choice question. A fiscal year end A quarterly year end A 52/53 week year end A calendar year end

Danielle must use the accrual method for reporting gross profit even though she uses the cash method of accounting for everything else.

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? Multiple choice question. Danielle must use the accrual method for reporting gross profit even though she uses the cash method of accounting for everything else. Danielle has a choice of reporting gross income under either the accrual method or the cash method even though she uses the cash method otherwise. Danielle must use the cash method for reporting gross profit in order to be consistent within her business. Danielle must switch to the accrual method for business reporting because she sells products she acquires for resale as her main source of income. Need help? Review these concept resources.

50

Due to the personal enjoyment element involved with business meals not purchased from a restaurant, taxpayers may only deduct ___% of the actual cost.

The course or courses qualify Evan for a new trade or business.

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? Multiple choice question. The course or courses meet the requirements necessary to keep his job. The course or courses only improve Evan's skills in his existing business. The course or courses qualify Evan for a new trade or business.

The course or courses qualify Evan for a new trade or business.

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? Multiple choice question. The course or courses qualify Evan for a new trade or business. The course or courses only improve Evan's skills in his existing business. The course or courses meet the requirements necessary to keep his job.

Blank 1: receipts Blank 2: 27

For 2022, taxpayers with average annual gross ____ during the prior 3 years of ____ million dollars are not subject to the business interest deduction limitation.

allowance; direct write-off

For accrual-method businesses, bad debt expense is recognized using the ______ method for financial accounting and is deducted using the ______ method for tax purposes. Multiple choice question. direct write-off; allowance allowance; direct write-off direct write-off; direct write-off allowance; allowance

Blank 1: liability Blank 2: all, fixed, or All Blank 3: events, determinable, event, or Events Blank 4: year or Year

For financial reporting purposes, an advance payment for services is NOT recorded as a revenue, but rather recorded as a(n) _____. 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 ____ -____ test. However, there is an exception which allows the prepaid income to be recognized in the ____following the receipt if certain conditions are met.

IRS

For tax purposes, when a business wants to adopt a new accounting method, it must get permission from the _____.

accrual

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.

The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes.

How does the accrual method for tax reporting differ from the accrual method for financial reporting? Multiple choice question. The reporting rules tend to be biased toward understating profitability for tax purposes. The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes. The reporting rules tend to be structured to recognize income earlier for financial accounting purposes than for tax reporting purposes. The reporting rules for tax purposes are designed to guard against overstating the company's profitability.

Prepaying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up within 12 months. Revenue is recognized when cash is received no matter when the sale actually took place

If a company uses a cash method of accounting, which of the following statements will be true? (Check all that apply.) Multiple select question. Expenditures for prepaid interest expense are deducted when paid. Prepaying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up within 12 months. Revenue is recognized when cash is received no matter when the sale actually took place. Payments received in a noncash form (such as property or services) are NOT included in gross income.

Blank 1: economic Blank 2: performance

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.

records

In order to deduct the business portion of mixed motive expenses, taxpayers must have sufficient ____ to prove the business use of the asset.

Blank 1: all or fixed Blank 2: events, determinable, or event Blank 3: amount or value

In order to meet the ____ ____ test for deducting an expense, everything necessary to establish the liability giving rise to the deduction must have occurred, and the business must be able to determine the ____of the liability with reasonable accuracy.

Blank 1: income, revenue, or revenues Blank 2: deductions, expenses, deduction, or expense Blank 3: deductions, expenses, deduction, or expense Blank 4: income, revenues, or revenue

In reporting financial statement income, businesses have incentives to select accounting methods that accelerate ____ and defer ____ . In reporting taxable income, businesses have incentives to select accounting methods that accelerate ____and defer_____ .

Tuition for the marketing course

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? Multiple choice question. groceries for his lunches while at work tuition and clothing Tuition for the marketing course khaki pants and blue shirt none are deductible

30

Taxpayers with substantial gross receipts are generally limited to deducting no more than ____ percent of their adjusted taxable income, plus their business interest income, as a business interest deduction.

Blank 1: economic Blank 2: performance

The _____ ____ test specifies that businesses may NOT recognize a deduction for an expense until the underlying activity generating the associated liability has occurred.

accrual

The _______-method of tax reporting provides a better matching of revenues and expenses.

cash

The ____method of accounting recognizes revenues when property is received and recognizes deductions when the expense is paid.

Blank 1: cash or cash basis Blank 2: accrual Blank 3: hybrid or mixed

The accounting methods that can be chosen for tax reporting include the ____method, ____the method, and ____the method

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.

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? Multiple choice question. This rule holds for prepayment of interest or rent. For financial accounting, the prepayment is recorded as a liability and not recognized as income until the service is performed. 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. 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.

Blank 1: financial, GAAP, or book Blank 2: tax

The allowance method of recognizing bad debt expense is used for _____ reporting, while the direct write-off method is used for _____ reporting.

Blank 1: profit Blank 2: hobby

The objective of business activities is to make a(n) ____. When a taxpayer's activity is pursued for personal pleasure, that activity is treated as a(n) _____when revenues and expenses are incurred.

Blank 1: accrual Blank 2: cash

The tax laws do not allow a(n)______ -method business to deduct accrued expenses for a liability owed to a related party using the ______-method until the related party recognizes the related income from the transaction.

ordinary

The term _____ is used to describe an expense that is normal or appropriate for the business under the circumstances.

True

True or false: The economic performance test generally requires that underlying activity generating the liability has occurred in order for the associated expense to be deductible.

It is primarily a service business and average gross receipts for the past three years have NOT exceeded $27 million annually. It is primarily a retail business and average gross receipts for the past three years have NOT exceeded $27 million annually.

Under what circumstances may a cash-method business be allowed to use the cash method to account for inventory? Multiple select question. It is primarily a service business and average gross receipts for the past three years have NOT exceeded $27 million annually. A cash-method business can always use the cash method to account for gross profit. It is primarily a service business and average gross receipts for the past three years HAVE exceeded $27 million annually. It is primarily a retail business and average gross receipts for the past three years have NOT exceeded $27 million annually. It is primarily a retail business and average gross receipts for the past three years HAVE exceeded $27 million annually.

Annual gross receipts for the three-year period prior to the current year do not exceed $27 million.

Under which of the following conditions may a taxpayer use the cash method to account for inventory? Multiple choice question. Primary business activity must be selling products that were acquired for resale or manufactured by the business. Total assets of the business may not exceed $27 million. Annual gross receipts for the three-year period prior to the current year do not exceed $27 million. Primary business activity must be to provide services to customers with sales of products being a secondary source of income.

Blank 1: personal Blank 2: expenses

Unless "expressly" authorized by a provision in the law, ____ ____ are nondeductible.

Business must report their income and deductions for a full 12 month year, unless special circumstances apply.

What are the rules concerning reporting periods for tax purposes? Multiple choice question. Businesses can file tax returns as often as they want, but must report at least once per year. Businesses must file tax returns reporting income and deductions on a quarterly basis. A business tax year can NOT consist of a period less than 12 months. Business must report their income and deductions for a full 12 month year, unless special circumstances apply

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

What two events must have occurred to meet the all-events test? (Check all that apply.) Multiple select question. 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 the terms and conditions of a job or project have been negotiated and a contract has been signed When the work is over 50 percent completed on a job

Internal Revenue Service

When a business wants to change an accounting method for tax reporting, such as the cost-flow method used for inventory, what body must give permission for the change? Multiple choice question. Tax court Financial Accounting Standards Board Congress Internal Revenue Service

After it has used the method for two consecutive years

When is a business deemed to have adopted an impermissible accounting method? Multiple choice question. After it has used the method for two consecutive years After it has used the method for one year After filing a Form 3115 to designate an accounting method A business can NOT adopt an impermissible accounting method; it is against the tax laws

When it is not extravagant

When is a business expense deemed to be reasonable in amount? Multiple choice question. When it is not illegal When it is not extravagant When it is paid to a person or entity that is not related to the taxpayer

Credit method

Which of the following accounting methods is NOT acceptable for tax reporting? Multiple choice question. Accrual method Credit method Hybrid method Cash method

Advertising cost for ads placed in the local newspaper Legal fees incurred to defend the business in a lawsuit Depreciation expense on a building used to store company vehicles

Which of the following business expenses are deductible for tax purposes? (Check all that apply.) Multiple select question. Interest expense paid on loans to purchase tax-exempt securities Advertising cost for ads placed in the local newspaper Contributions to the governor's reelection campaign Traffic fines incurred by an over-the-road truck driver Legal fees incurred to defend the business in a lawsuit Depreciation expense on a building used to store company vehicles

Political contributions Lobbying expenses Bribes and kickbacks Entertainment expense Interest expense paid on loans to purchase tax-exempt securities

Which of the following business expenses are disallowed or limited for tax purposes? (Check all that apply.) Multiple select question. Political contributions Lobbying expenses Advertising expenses Bribes and kickbacks Entertainment expense Rent expense Interest expense paid on loans to purchase automobiles owned and used by the business Interest expense paid on loans to purchase tax-exempt securities

Bookkeeping is easier. There is more flexibility to time the recognition of income and deductions.

Which of the following choices are advantages to the taxpayer of choosing the cash-method of tax reporting rather than the accrual-method? (Check all that apply.) Multiple select question. The cash method provides a better matching of revenues and expenses. Bookkeeping is easier. There is more flexibility to time the recognition of income and deductions. It is required for C corporations and partnerships with corporate partners unless they meet certain size requirements.

All-events test Economic performance test

Which of the following choices are tests that need to be met in order to deduct an expense under the accrual method? (Check all that apply.) Multiple select question. All-events test Accrual method test Uniform cost capitalization test Economic performance test

Gross profit from inventory sales Income from services provided Income from renting property

Which of the following choices constitutes gross income from a business? (Check all that apply.) Multiple select question. Gross profit from inventory sales Income from services provided Revenue less business expenses Income from renting property

Gross income for a business may be calculated as sales less returns and discounts.

Which of the following choices is INCORRECT when defining the gross income of a business? Multiple choice question. Revenues from renting property is included in gross profit for rental businesses. Gross income for a business may be calculated as sales less returns and discounts. Gross income for a service business can be calculated as income from services provided. Gross income from a business includes gross profit from inventory sales.

The cost of driving from home to work

Which of the following choices is NOT considered deductible transportation expenses? Multiple choice question. The cost of driving from home to work The cost of airfare to attend a business conference in another state The cost of driving a pizza delivery vehicle to deliver pizzas The cost of driving to a client's place of business to deliver a final report

The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles.

Which of the following choices is NOT correct regarding deductible transportation expenses for a taxpayer using her personal vehicle for business purposes? Multiple choice question. The taxpayer can deduct a standard mileage rate based on business miles driven. The taxpayer can deduct the business portion of the actual costs of operating the vehicle plus depreciation. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles. The taxpayer can NOT deduct the costs of commuting from her home to her regular place of business.

Repetitive in nature

Which of the following criteria is NOT required for a business expense to be considered ordinary and necessary? Multiple choice question. Appropriate under the circumstances Repetitive in nature Helpful to the business Conducive to the business activities

The meal must be eaten on the business premises.

Which of the following criteria is NOT required for a meal to be considered a tax-deductible business meal? Multiple choice question. The taxpayer or an employee of the taxpayer must be present for the meal. The meal must be eaten on the business premises. The meal must be directly associated with the active conduct of the business. The amount must be reasonable under the circumstances.

Hobbies are not primarily profit-motivated.

Which of the following describes the difference between business activities and hobbies? Multiple choice question. Business activities do not have net losses. Hobbies do not generate revenue. Business activities require a full-time work schedule. Hobbies are not primarily profit-motivated.

Charlie paid $50 to attend a play during his 3-day business trip.

Which of the following expenses is NOT included with deductible business travel expenses? Multiple choice question. Charlie paid $50 to attend a play during his 3-day business trip. Charlie incurred $90 in transportation expenses when driving his personal car to a 3-day business conference. Charlie paid $200 for a hotel room in the hotel where the business conference was being held. Charlie paid $15 for dinner, eaten alone, at a restaurant adjoining his hotel while at the business conference.

Protective clothing for a self-employed construction worker Cost of uniforms that include a company logo

Which of the following may qualify as a deductible business expense: Multiple select question. Cost of food for the household Protective clothing for a self-employed construction worker Cost of uniforms that include a company logo Monthly mortgage payment for a primary residence of a taxpayer who earns a salary as an employee

Specific identification Last-in, first-out First-in, first-out

Which of the following methods are the primary inventory cost-flow methods used for tax purposes? (Check all that apply.) Multiple select question. Lower-of-cost-or-market Weighted average cost Specific identification Last-in, first-out First-in, first-out Need help? Review these concept

Weighted average cost

Which of the following methods is NOT a primary inventory cost-flow method used for tax purposes? Multiple choice question. Last-in, first-out First-in, first-out Weighted average cost Specific identification

The IRS automatically approves certain types of accounting method changes. The business may have to pay a fee and provide a good business reason for making the change.

Which of the following statements are CORRECT when requesting permission to change accounting methods? (Check all that apply.) Multiple select question. The SEC must grant approval for the accounting change. It is NOT necessary to request permission to change from an impermissible method to a permissible method. The IRS automatically approves certain types of accounting method changes. The business may have to pay a fee and provide a good business reason for making the change.

Under UNICAP, businesses generally capitalize the inventory costs in one period and deduct them in a subsequent period. Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to employees in production supporting departments. UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than they do for financial reporting.

Which of the following statements are correct regarding inventory capitalization rules? (Check all that apply.) Multiple select question. Selling, advertising, and research costs must be allocated to inventory under the UNICAP provisions. Under UNICAP, businesses generally capitalize the inventory costs in one period and deduct them in a subsequent period. Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to employees in production supporting departments. GAAP rules require businesses to capitalize more costs to inventory for financial reporting purposes than they do for tax purposes. UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than they do for financial reporting.

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 statements are correct regarding the recognition of the cumulative difference in taxable income due to a change in accounting method? (Check all that apply.) Multiple select question. If the adjustment increases taxable income, it is recognized in its entirety in the year of the change. 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. If the adjustment decreases taxable income, it is recognized over 4 years by subtracting 25% of the decrease each year.

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.

Which of the following statements are correct regarding the requirements to meet the economic performance test under the various ways a liability can arise? (Check all that apply.) Multiple select question. When a business agrees to pay another party for services, the deduction is taken as the other party provides the services. When a business agrees to provide services to another party, the expenses incurred for those services cannot be deducted until the payment is made. Certain liabilities, such as rebates, refunds, and workers compensation payments, must be deducted when paid regardless of when the liability arises. When a business prepays on a lease or rental agreement, the deduction is taken when the payment is made.

Under the UNICAP rules, only costs incurred inside the production facility are allocated to inventory.

Which of the following statements is INCORRECT concerning the uniform cost capitalization (UNICAP) rules? Multiple choice question. Under the UNICAP rules, only costs incurred inside the production facility are allocated to inventory. Under the UNICAP rules selling, advertising, and research costs do NOT have to be allocated to inventory. The UNICAP rules are targeted to large businesses. Under these rules, businesses are generally required to capitalize more costs to inventory for tax purposes than under financial accounting rules.

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 statements is INCORRECT regarding the requirements to meet the economic performance test under the various ways a liability can arise? Multiple choice question. 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, can be deducted when incurred regardless of when payment is made. When a business agrees to provide services to another party, the expenses incurred are deducted as the service is provided or costs incurred. When a business prepays on a lease or rental agreement, the deduction is allocated over the rental period.

It is NOT necessary to request permission to change from an impermissible method to a permissible method.

Which of the following statements is INCORRECT when requesting permission to change accounting methods? Multiple choice question. The IRS automatically approves certain types of accounting method changes. It is NOT necessary to request permission to change from an impermissible method to a permissible method. A Form 3115 must be filed with the IRS. The business may have to pay a fee and provide a good business reason for making the change.

One hundred percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.

Which of the following statements is correct regarding the deductibility of business meals purchased in a restaurant when a taxpayer is traveling for business? Multiple choice question. The cost of meals is fifty percent deductible if the taxpayer is away from home overnight. The cost of meals is NOT deductible because a taxpayer would have to eat whether they were home or away from home. One hundred percent of the cost of meals is deductible only if there is a business associate with the taxpayer. One hundred percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.

Businesses have an incentive to maximize financial reporting income, but minimize taxable income.

Which of the following statements is correct when describing the accounting methods used for tax versus financial reporting? Multiple choice question. Taxable income and financial reporting income should equal the same amount. Businesses have an incentive to maximize financial reporting income, but minimize taxable income. All reporting requirements for GAAP are permissible methods of reporting for tax purposes. Businesses must use the same accounting method for tax purposes that they use for financial reporting purposes.

The records should include written evidence of personal use.

Which of the information listed below is NOT a requirement of the documentation needed to substantiate the business portion of mixed motive expenses? Multiple choice question. The records should be written. The records should be contemporaneous. The records should include the amount. The time and business purpose should be included. The records should include written evidence of personal use.

The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business.

Which one of the following statements is correct regarding an asset that is used for both business and personal purposes? Multiple choice question. The entire amount of any expense related to the asset is deductible since it is necessary to have the asset for the business. The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business. None of the expense related to the asset is deductible since this treatment would lend itself to taxpayer abuse. One-half of the expense related to the asset is deductible as a business expense.

Necessary

Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses? Multiple choice question. Necessary Relevant Important Crucial