4328 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 Reason: 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.

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?

$1,700 - M&C must use the direct write-off method for tax purposes.

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

Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses? Important Ordinary Relevant Crucial

Ordinary

If a company uses a cash method of accounting, which of the following statements will be true? (Check all that apply.) Multiple select question. Payments received in a noncash form (such as property or services) are NOT included in gross income. 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. 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.

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

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

Which of the following criteria is NOT required for a business expense to be considered ordinary and necessary?

Repetitive in nature

Which of the following statements are CORRECT when requesting permission to change accounting methods? (Check all that apply.) Multiple select question. The IRS automatically approves certain types of accounting method changes. The SEC must grant approval for the accounting change. The business may have to pay a fee and provide a good business reason for making the 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.

Which of the following choices is NOT considered deductible transportation expenses?

The cost of driving from home to work

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.

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.

Which of the following criteria is NOT required for a meal to be considered a tax-deductible business meal?

The meal must be eaten on the business premises.

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?

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.

Which of the following choices is NOT correct regarding deductible transportation expenses for a taxpayer using her personal vehicle for business purposes?

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 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 files a tax return 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).

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 Partnership 3. S corporation 4. C corporation

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.

1; 2

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

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.

30

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

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

50

When is a business deemed to have adopted an impermissible accounting method?

After it has used the method for two consecutive years

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. Uniform cost capitalization test All-events test Economic performance test Accrual method test

All-events test Economic performance test

Under which of the following conditions may a taxpayer use the cash method to account for inventory?

Annual gross receipts for the three-year period prior to the current year do not exceed $26 million.

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

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

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

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

Blank 1: cash or cash basis Blank 2: accrual Blank 3: hybrid or 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 or accumulated Blank 2: 25 or twenty-five Blank 3: 100 or one hundred

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, GAAP, or book Blank 2: tax

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 _____.

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

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 statements is INCORRECT regarding the requirements to meet the economic performance test under the various ways a liability can arise?

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?

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

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

IRS, Commissioner, or Internal Revenue Service

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 decreases taxable income, it is recognized over 4 years by subtracting 25% of the decrease each year. 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 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? (Check all that apply.) Multiple select question. Revenue less business expenses Income from renting property Income from services provided Gross profit from inventory sales

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

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

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

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?

Internal Revenue Service

Which of the following statements is INCORRECT when requesting permission to change accounting methods?

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

Under what circumstances may a cash-method business be allowed to use the cash method to account for inventory? (Check all that apply.) Multiple select question. It is primarily a service business and average gross receipts for the past three years have NOT exceeded $26 million annually. It is primarily a service business and average gross receipts for the past three years HAVE exceeded $26 million annually. It is primarily a retail business and average gross receipts for the past three years have NOT exceeded $26 million annually. It is primarily a retail business and average gross receipts for the past three years HAVE exceeded $26 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 NOT exceeded $26 million annually. It is primarily a retail business and average gross receipts for the past three years have NOT exceeded $26 million annually.

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

Necessary

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.

True Reason: The economic performance rule often prevents the use of the 12 month exception to the all events test because the underlying activity must have occurred in order to deduct the expense. There are some exceptions.

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 Reason: The taxpayer must be away from home overnight or long enough to require rest.

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? (Check all that 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

When is a business expense deemed to be reasonable in amount?

When it is not extravagant

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

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.

accrual; 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.

allowance; direct write-off

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

cash

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 _____.

constructively/actually; paid

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

economic 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.

first/initial; 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 _____-_____ test. However, there is an exception which allows the prepaid income to be recognized in the _____ following the receipt if certain conditions are met.

lability; all/fixed; event(s)/determinable; year

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

necessary or necessary expense

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

ordinary or ordinary expense

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

ordinary; necessary

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

personal expense(s)

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

reasonable

For 2021, taxpayers with average annual gross _____ during the prior 3 years of _____ million dollars are not subject to the business interest deduction limitation.

receipts, sales, revenue, or receipt; 26

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

True or false: Taxpayers that report average gross receipts of $26 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

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 prepays on a lease or rental agreement, the deduction is taken when 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 agrees to provide services to another party, the expenses incurred for those services cannot be deducted until the payment is made. 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. When a business agrees to pay another party for services, the deduction is taken as the other party provides the services.

Which of the following expenses is NOT included with deductible business travel expenses?

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

Which of the following accounting methods is NOT acceptable for tax reporting?

Credit method

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.

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

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