Tax 332 Chapter 9
What two events must have occurred to meet the all-events test? (Check all that apply.)
- When the amount of the income can be determined with reasonable accuracy - When all events have occurred that determine or fix the business's right to receive the income
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.
2,400
When is a business deemed to have adopted an impermissible accounting method?
After it has used the method for two consecutive years
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.
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 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
For tax purposes, when a business wants to adopt a new accounting method, it must get permission from the _____ .
IRS
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.
The _____ -method of tax reporting provides a better matching of revenues and expenses.
accrual
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.
accrual cash
Despite the use of the accrual method, prepaid ____ and prepaid _____ are taxed immediately upon receipt.
rent, interest
Which of the following criteria is NOT required for a business expense to be considered ordinary and necessary?
repetitive in nature
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
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
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 ($300 x .70 = $210).
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.)
- 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 methods are the primary inventory cost-flow methods used for tax purposes? (Check all that apply.)
- First-in, first-out - Specific identification - Last-in, first-out
Which of the following business expenses are disallowed or limited for tax purposes? (Check all that apply.)
- Interest expense paid on loans to purchase tax-exempt securities - Political contributions - Lobbying expenses - Bribes and kickbacks - Entertainment expense
Under what circumstances may a cash-method business be allowed to use the cash method to account for inventory? (Check all that apply.)
- 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 service business and average gross receipts for the past three years have NOT exceeded $26 million annually.
Which of the following business expenses are deductible for tax purposes? (Check all that apply.)
- Legal fees incurred to defend the business in a lawsuit - Advertising cost for ads placed in the local newspaper - Depreciation expense on a building used to store company vehicles
Match the business entity with the tax form used to report taxable income.
- Schedule C = Sole Proprietorship - Form 1065 = Partnership - Form 1120 = S Corporations - Form 1120 = C Corporation
Which of the following statements are CORRECT when requesting permission to change accounting methods? (Check all that apply.)
- 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. Concept ResourcesRead
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.)
- There is more flexibility to time the recognition of income and deductions. - Bookkeeping is easier.
Which of the following statements are correct regarding inventory capitalization rules? (Check all that apply.)
- 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 the recognition of the cumulative difference in taxable income due to a change in accounting method? (Check all that apply.)
- 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 a company uses a cash method of accounting, which of the following statements will be true? (Check all that apply.)
-Paying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up to 12 months - Revenue is recognized when cash is received no matter when the sale actually took place.
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
Leonard's Lofts rents townhouses to tenants. When a tenant moves in, they are required to pay the first month's rent of $525 and prepay the last month's rent of $525. In addition, the tenant must pay a refundable security deposit of $600. Leonard's Lofts uses the accrual method for tax reporting. Upon receipt of the $1,650, Leonard's Lofts must recognize $_____ in rental revenue.
1050
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 meals, taxpayers may only deduct ______% of the actual cost.
50
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. = Partnership - Entity reports income on tax forms separate tax (information) forms, but the profit or loss flows through to owners' individual income tax returns. = C corporation - Income is taxed at the entity level rather than flowing through to the owner(s).
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
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.
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.
An accrual-method business receiving an advance payment for goods that it will provide to customers in the future must account for the prepayment for tax purposes under the deferral method, meaning that the income recognition is deferred until the period the goods are delivered.
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
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.
The allowance method of recognizing bad debt expense is used for ______ reporting, while the direct write-off method is used for _______ reporting.
GAAP tax
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.
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.
Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses?
Ordinary
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.
Businesses have an incentive to maximize financial reporting income, but minimize taxable income.
The insurance proceeds minus the adjusted basis
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
Which of the following rules for casualty losses does NOT pertain to business assets?
The loss is reduced by a $100 per casualty floor and the total of all losses is reduced by 10% of AGI.
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.
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 income earlier for tax purposes than for financial accounting purposes.
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.
The economic performance test generally requires that underlying activity generating the liability has occurred in order for the associated expense to be deductible.
True
Under the all-events test, in addition to specifying that all events to establish the liability must have occurred, the test also provides that the business must be able to determine the amount of the liability with reasonable accuracy.
True
Which of the following statements is INCORRECT concerning the uniform cost capitalization (UNICAP) rules?
Under the UNICAP rules, only costs incurred inside the production facility are allocated to inventory.
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
Which of the following methods is NOT a primary inventory cost-flow method used for tax purposes?
Weighted average cost
When is a business expense deemed to be reasonable in amount?
When it is not extravagant
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 ______
accelerate income, defer deductions, defer income, accelerate deductions.
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 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.
accrual cash
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
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.
accumulated, 25, 100
Businesses using the accrual method of accounting generally recognize income when they meet the ______ - ______ test.
all - events
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.)
all events test, economic performance test
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
The ______ method of accounting recognizes revenues when property is received and recognizes deductions when the expense is paid.
cash
The accounting methods that can be chosen for tax reporting include the _____ method, the _____ method, and the _____ method.
cash accrual hybrid
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 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______
constructively paid
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
In order to deduct the business portion of mixed motive expenses, taxpayers must have sufficient ______ to prove the business use of the asset.
evidence
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, last
When an accrual-method business receives an advance payment for goods it will provide to customers in the future, the business may account for the prepayment under the ______ - ______ method or the ______ method.
full - inclusion, deferral
An accrual-method business electing the ______ will immediately recognize an advance payment as income, but a business electing the ______ will recognize the income for tax purposes either when it would have recorded it without the advance payment or when it recognizes the income for financial accounting purposes.
full-inclusion method; deferral method
For tax purposes, when a business wants to adopt a new accounting method, it must get permission from the ____ .
irs
The term ______ is used to describe an expense that is helpful or conducive to a business activity.
necassary
The term _____ is used to describe an expense that is helpful or conducive to a business activity.
necessary
A business is deemed to have adopted a permissible accounting method if it has used the method for _____ year(s). It is deemed to have adopted an impermissible accounting method if it has used the method for _____ consecutive years.
one two
All _____ and ______ expenses that are reasonable in amount and incurred in carrying on a trade or business are deductible for tax purposes.
ordinary, necessary
______ casualty losses in a presidentially declared disaster area are generally deductible from AGI as itemized deductions, and ______ casualty losses are deductible for AGI.
personal, 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
Ordinary and necessary business expenses are deductible only to the extent they are _____ in amount.
reasonable
