Tax Chapter 9

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

Blank 1: Economic Blank 2: Performance

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

Blank 1: Financial Blank 2: Tax

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

C

Form 1120

C corporation

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

D

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

D

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

D

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? A. $300 B. $0 C. $90 D. $210

D ($300 x .70)

Partnership

Entity files a tax return but the profit or loss flows through to owners' individual income tax returns.

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

IRS

Sole Proprietorship

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.

Form 1120S

S corporation

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

Form 1065

partnership

Schedule C

sole proprietorship

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

50

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? A. The equipment should be capitalized and depreciated according to the tax code. B. The equipment should be deducted in the year that it is purchased. C. The equipment should NOT be deducted until the year Allison sells or disposes of it.

A

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? A. Internal Revenue Service B. Tax court C. Financial Accounting Standards Board D. Congress

A

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

A

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

A

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

A

Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses? A. Necessary B. Important C. Relevant D. Crucial

A

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? A. $0 B. $200 C. $2,400 D. $150

A (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.)

Montgomery & Company are accounting for their bad debts. The company uses the accrual method of accounting. During the current year, M&C has $42,000 in accounts receivable. The estimated bad debts for the period is $2,000 using the allowance method of accounting for uncollectible accounts. The amount of accounts actually written off during the period is $1,700. What is the amount of bad debt expense that can be deducted for tax purposes? A. $1,700 - M&C must use the direct write-off method for tax purposes. B. $0 - M&C would need to use the cash method of accounting in order to deduct bad debts. C. $2,000 - M&C must use the allowance method for tax purposes. D. $300 - M&C must use the increase in the Allowance for Doubtful Accounts.

A (must use the accrual method of accounting and can only deduct the amount that would be deductible under the direct write-off method.)

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.) A. There is more flexibility to time the recognition of income and deductions. B. The cash method provides a better matching of revenues and expenses. C. It is required for C corporations and partnerships with corporate partners unless they meet certain size requirements. D. Bookkeeping is easier.

A and D

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.) A. Certain liabilities, such as rebates, refunds, and workers compensation payments, must be deducted when paid regardless of when the liability arises. B. When a business prepays on a lease or rental agreement, the deduction is taken when the payment is made. C. When a business agrees to provide services to another party, the expenses incurred for those services cannot be deducted until the payment is made. D. When a business agrees to pay another party for services, the deduction is taken as the other party provides the services.

A and D

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

A, B and D

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? A. 0 B. 4,500 C. 11,500 D. 18,000

B

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

B

Which of the following statements is INCORRECT regarding the requirements to meet the economic performance test under the various ways a liability can arise? A. When a business prepays on a lease or rental agreement, the deduction is allocated over the rental period. B. Certain liabilities, such as rebates, refunds, and workers compensation payments, can be deducted when incurred regardless of when payment is made. C. When a business agrees to pay another party for services, the deduction is taken as the other party provides the services. D. When a business agrees to provide services to another party, the expenses incurred are deducted as the service is provided or costs incurred.

B

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.) A. If the adjustment decreases taxable income, it is recognized over 4 years by subtracting 25% of the decrease each year. B. If the adjustment increases taxable income, it is recognized over 4 years by adding 25% of the increase each year. C. If the adjustment decreases taxable income, it is recognized in its entirety in the year of the change. D. If the adjustment increases taxable income, it is recognized in its entirety in the year of the change.

B and C

What two events must have occurred to meet the all-events test? (Check all that apply.) A. When the terms and conditions of a job or project have been negotiated and a contract has been signed B. When all events have occurred that determine or fix the business's right to receive the income C. When the work is over 50 percent completed on a job D. When the amount of the income can be determined with reasonable accuracy

B and D

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.) A. Accrual method test B. All-events test C. Uniform cost capitalization test D. Economic performance test

B and D

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

B, C and D

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

B, D, E, G and H

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: 30

The ____________-method of tax reporting provides more flexibility to time income and deductions by accelerating or deferring payments.

Blank 1: Cash

The accounting methods that can be chosen for tax reporting include the _______________ method, the _______________ method, and the _______________ method.

Blank 1: Cash Blank 2: Accrual Blank 3: Hybrid/Mixed

In the year that a business changes its accounting method, it must make an adjustment to taxable income that represents the _______________ difference for the amount that would have been taxed or deducted in prior years. If the adjustment increases taxable income, the taxpayer includes ______________ % of the addition in the current year. If the adjustment decreases taxable income, the taxpayer includes _______________% of the deduction in the current year.

Blank 1: Cumulative Blank 2: 25 Blank 3: 100

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.

Blank 1: Economic Blank 2: Performance

The __________ , __________ test generally requires that underlying activity generating the liability has occurred in order for the associated expense to be deductible.

Blank 1: Economic Blank 2: Performance

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: First/Initial Blank 2: Final/Last

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 all-events test. However, there is an exception which allows the prepaid income to be recognized in the ______________ following the receipt if certain conditions are met.

Blank 1: Liability Blank 2: Year

The term __________ is used to describe an expense that is helpful or conducive to a business activity.

Blank 1: 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: Ordinary Blank 2: Necessary

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

Blank 1: Reasonable

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.

Blank 1: Uniform Blank 2: Cost Blank 3: Capitalization

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: all Blank 2: events Blank 3: amount

Businesses using the accrual method of accounting generally recognize income when they meet the economic _____________ , ____________ test.

Blank 1: all/fixed Blank 2: Events/Determinable/Event

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.

Blank: 2400

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

Blank: Cash

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

C

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

C

Under which of the following conditions may a taxpayer use the cash method to account for inventory? A. Primary business activity must be to provide services to customers with sales of products being a secondary source of income. B. Primary business activity must be selling products that were acquired for resale or manufactured by the business. C. Annual gross receipts for the three-year period prior to the current year do not exceed the statutory limitation $29 million for 2023. D. Total assets of the business may not exceed the statutory limitation adjusted for inflation, $29 million in 2023.

C

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

C

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? A. Danielle must use the cash method for reporting gross profit in order to be consistent within her business. B. 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. C. Danielle must switch to the accrual method for business reporting because she sells products she acquires for resale as her main source of income. D. Danielle must use the accrual method for reporting gross profit even though she uses the cash method of accounting for everything else.

D

Which of the following accounting methods is NOT acceptable for tax reporting? A. Hybrid method B. Accrual method C. Cash method D. Credit method

D

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

D

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

D

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

D

True or false: Taxpayers that report average gross receipts of $27 million or less for the three-tax year period ending with the prior tax year must use the accrual method to account for inventory even if they are a cash method taxpayer.

False

True or false: Under the all-events test, a business may not recognize a deduction for an expense until the underlying activity generating the associated liability has occurred.

False

C corporation

Income is taxed at the entity level rather than flowing through to the owner(s).