chapter 9 tax smartbook

Which of the following business expenses are deductible for tax purposes? (Check all that apply.)

1). Advertising cost for ads placed in the local newspaper 2). Legal fees incurred to defend the business in a lawsuit 3). Depreciation expense on a building used to store company vehicles

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.)

1). All-events test 2). Economic performance test

Which of the following choices constitutes gross income from a business? (Check all that apply.)

1). Gross profit from inventory sales. 2). Income from services provided. 3). Income from renting property

Which of the following business expenses are disallowed or limited for tax purposes? (Check all that apply.)

1). Interest expense paid on loans to purchase tax-exempt securities 2). Political contributions 3). Bribes and kickbacks 4). Entertainment expense 5). Lobbying expenses

If a company uses a cash method of accounting, which of the following statements will be true? (Check all that apply.)

1). Revenue is recognized when cash is received no matter when the sale actually took place. 2). Prepaying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up within 12 months.

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

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

1). cash 2). accrual 3). mixed

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 _.

1). constructively 2). paid

Due to the personal enjoyment element involved with meals, taxpayers may only deduct _% of the actual cost.

50%

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 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 are NOT acceptable for tax reporting?

Credit method

Match the entity with the statement that describes the tax treatment of that entity. Partnership

Entity reports income on tax forms separate tax (information) forms, but the profit or loss flows through to owners' individual income tax returns.

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.

Which of the following describes the difference between business activities and hobbies?

Hobbies are not primarily profit-motivated.

Match the entity with the statement that describes the tax treatment of that entity. C corporation

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

Match the entity with the statement that describes the tax treatment of that entity. 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.

Sydney operates a small business. She sold some equipment used in her business for $7,500. The equipment had an adjusted basis of $8,000. How will this transaction impact Sydney's tax liability?

Sydney will report a deductible loss of $500.

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

The cost of driving from home to work

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.

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.

When a business asset is completely destroyed due to a casualty, what is the amount of the deductible loss?

The insurance proceeds minus the adjusted basis (if the basis exceeds the proceeds)

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.

Which of the information listed below is NOT a requirement of the documentation needed to substantiate the business portion of mixed motive expenses?

The records should include written evidence of personal use.

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

When it is not extravagant

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

cash

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

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

evidence

True or false: Businesses are generally not allowed to deduct losses incurred with the sale or disposal of business assets. These losses must be used to offset any gains produced by the sale of other business assets or carried forward to offset future gains.

false: Losses on the sale or disposal of business assets are generally deductible.

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 and final

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

_ casualty losses in a presidentially declared disaster area are generally deductible from AGI as itemized deductions, and _ casualty losses are deductible for AGI.

personal and business

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.

profit. hobby.

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

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

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

ordinary

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

ordinary and necessary

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

reasonable

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 = (300x.70)

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 _.

1). income 2). deductions 3). deductions 4). income

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

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

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