BA304Module 6-9

1. S is a cash basis, calendar year taxpayer. She operates Cloth R Us. All of the store’s profits come from the sale of fabric. During the year she paid the following expenses:

1. $3,000 premium for liability insurance covering her business. The coverage runs from December 1, 2010 through November 30, 2013.2. $10,000 for cloth, all of which is still on hand at the end of the taxable year.3. $2,000 for “points” related to obtaining a loan for the purchase of her personal residence.4. $1,200 for “points” related to obtaining a loan on rental property.

S may deduct all of the expense incurred in 2010 for which item(s)?a. 1b. 1 and 2c. 1, 2, and 3d. 1, 3, and 4e. 3

2. L operates a sole proprietorship that manufactures lawn sprinklers. The business is an accrual basis, calendar year taxpayer. During the year, the following transactions occurred.

1. In December, L contracted for $5,000 with a distinguished products management firm, Y Research, to help him market his product nation-wide. Y performed the services in the following year.2. L has a long-time agreement with M Service Company to come once a month to service certain equipment. The Company charges L $50 per month. L accrues the fee at the end of each month and pays the bill when it is received, usually in the following month. This year M was extremely busy and was not able to perform its services for the month of December until January of the following year.3. L provides a one-year money back guarantee on his products. At the close of the current year he estimated that the guarantees for sprinklers sold during the year would cost him $1,500.

Indicate in which of the cases above L is entitled to accrue a deduction.a. 1b. 1 and 2c. 2d. 2 and 3e. 3

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3. Which of the following statements is true concerning deductions “for” and “from” adjusted gross income (A.G.I.)?a. A deduction from A.G.I. has no effect on the taxpayer’s self-employment tax liability.b. Corporations, like individuals, must classify their deductions as deductions for and from A.G.I.c. Misclassification of a deduction for A.G.I. has no effect on the taxpayer’s tax liability, assuming the taxpayer itemizes her or his deductions.d. Misclassification of a deduction for A.G.I. never has an effect on the taxpayer’s medical expense deduction.

5. B, a bank president, is a weekend potter. He regularly sells his pots at crafts fairs and spends an average of ten hours a week either making or marketing pots. Although he has made around $200 profit per year for the last two years from pottery sales, he tells everyone that he would do it for free. This year he had a $1,000 net loss due to increased entrance fees at the fairs. If B has been making and selling pots for only three years and he makes an election under § 183 to postpone IRS challenges, which of the following is a true statement if B makes a profit next year?a. He can carry forward this year’s $1,000 loss and deduct it for A.G.I.b. He is conclusively the owner of a for-profit business rather than a hobby.c. He may shift the burden of proof to the IRS, which must show that the pottery activity is not a business.d. He can postpone paying income tax on the profit until the challenge is resolved.

6. R’s only profit-seeking activities involve operation of several computer stores. She currently is considering undertaking a new venture. To this end, she pays a C.P.A. $800 to perform a financial analysis of the venture to determine whether to enter it. With respect to the expenditure, R maya. deduct the entire expense in the year incurred if the venture involves operation of a professional sports franchise, and she enters the venture.b. deduct the entire expense in the year incurred if the venture involves operation of a toy store, and she does not enter the venture.c. amortize the expenditure over 60 months if the venture involves operation of a winery, and she does enter the venture.d. amortize the expenditure over 60 months if the venture involves another computer store, and she does not enter the venture.

7. After having his best three quarters of earnings ever, and with a predicted strong fourth quarter, D, a sole proprietor who is a calendar year, cash basis taxpayer in a manufacturing business, is

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looking for ways to reduce his A.G.I. this year. Which of the following would probably not generate a deduction for A.G.I.?a. Expenses incurred in December for a big January ad campaign.b. Selling assets below his adjusted basis in them.c. Expenses incurred in providing information to the city council on matters of direct interest to the taxpayer.d. Buying life insurance on his key employees’ lives, with the business as beneficiary.

8. M works for MND Corporation, whose headquarters are in downtown Houston. The firm reassigned M to the real estate division, Woodacres, whose offices are in a nearby suburb, Conroe. The distance between the two jobsites is 43 miles. While M was working downtown it was 4 miles from his home to the office but the Woodacres office was 40 miles from M’s home. M decided that 40 miles was too far to commute, so early in 2002 he moved 25 miles to a new house that was 19 miles from the Woodacres jobsite and 29 miles from the downtown jobsite. The travel distance that determines whether or not M’s moving expenses are deductible isa. 19.b. 25.c. 36.d. 40.e. 43.

9. The moving expense provisions are designed to ensure that deductions are granted only when expenses arise from business concerns. Which one of the following statements most correctly describes the operation of the rules governing moving expenses?a. A deduction is denied unless the taxpayer moves more than some predetermined amount from his former residence.b. A deduction is denied unless the taxpayer’s commute, absent the move, would have increased by more than some predetermined amount.c. A deduction is granted as long as a taxpayer’s move is attributable to a job change.d. A deduction is granted if the taxpayer obtains either part-time or full-time employment at the new job site.

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10. J graduated from the University of Texas during the current year and accepted a job in Kansas City. J lived in Austin and moved to Kansas City to commence work on June 1. J drove 700 miles pulling a trailer with all of his belongings. J had rented the trailer for $200. On June 1 he moved into an apartment and lived there temporarily at a cost of $10 per day through July 15. On July 16 he moved into his new house. J will be able to claim a moving expense deduction ofa. $0.b. $291.c. $500.d. $591.e. $741.

11. T’s employer provides an office for her in its downtown headquarters. Which of the following statements is true? (investments are not Trade or Bz)a. T maintains an office in her home that she uses to conduct work related to her rental property. Even though the rental activities may be considered a business, no deduction can be allowed because T’s principal business is that of being an employee and its primary location is downtown.b. T regularly meets with clients of her employer’s business in her home office, which is exclusively used for such purpose. T is entitled to the home office deduction without further inquiry.c. T maintains a home office that is exclusively used on a regular basis to conduct work regarding her investment portfolio. No deduction is allowed.d. None of the statements above are true.

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12. T sold textbooks for a living by visiting different teaching institutions and showing samples of various books to professors. She typically carried about 100 books in her Volkswagen on her way from home to various local colleges and universities that she regularly called upon. Last year a sudden increase in the number of textbooks revised caused T to increase her quantity of samples from 100 to 300 books. To carry all of the books, T rented a trailer that she pulled behind her Volkswagen. T sought to deduct the cost of the trailer on her tax return. T willa. be allowed to deduct the cost of the trailer as an additional cost attributable to carrying the items that T needs for the cost of doing business normally.b. not be allowed to deduct the cost of the trailer. However, T could have deducted the additional cost of hauling the new books if she had bought a larger car and used the “same mode” of transporting them as before.c. not be allowed to deduct the cost of the trailer because T is still essentially using the “same mode” of hauling books as before, i.e., with a car.d. be allowed to deduct the cost of renting the trailer because she is not using the “same mode” of hauling the new books that she used for the old ones.

13. R coaches the basketball team at Houston High School. In preparation for the state playoffs he decided to scout his probable opponent, which was playing in San Antonio. On Friday afternoon, he left from school and drove to San Antonio to watch the game. Later that night he returned to school to work on plans for the upcoming game. He incurred the following costs: transportation, $25; meals, $5. The costs were not reimbursed. The coach may deducta. $20.b. $24.c. $25.d. $29.e. $30.

14. L flew from Chicago to Miami primarily for a business meeting. The meeting lasted three days, so she stayed

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in Miami for two additional days to enjoy the sunshine and visit. With respect to the plane fare for the trip, L should (domestic travel)a. prorate the plane fare based on time devoted to business and personal activities and deduct the business portion.b. divide the plane fare equally between business and personal activities and deduct the business portion.c. deduct the entire plane fare.d. deduct none of the plane fare.e. none of the above.

15. In which case are deductions not allowed with respect to the directly-related-to and associated-with tests for entertainment expense?a. Meal expense for client J and spouse at a business lunch. b. Cost of seven kegs of beer and 200 hot dogs for the annual company picnic for employees and their families.c. Cost of wine and cheese to be distributed free to guests and prospective buyers at a gallery opening.d. Cost of a two-week vacation trip to Hawaii for the company’s top salesperson, who reports the value of the trip as taxable compensation.e. All of the above are deductible.

16. After securing a large order of magic supplies, Q took his customer to lunch. He paid $40, for which his company, Novelties, Inc., reimbursed him. Which statement is true? (full amount for the individual but

half for company)a. Q may deduct $20.b. Q includes $40 as income and deducts the entire amount.c. Novelties, Inc., may deduct $20.d. Novelties, Inc., may deduct $40.e. Both b and c are true.

17. J, a cash basis taxpayer, is the general manager of a minor league baseball club. The corporate owner has promised J, in a valid contract, a $5,000 bonus if attendance exceeded 250,000 this year. Attendance was 250,070. The owner reneges on the $5,000 bonus. Upset, J quits and goes to Florida.a. J can treat the $5,000 that was not paid as a business bad debt.b. J can treat the $5,000 that was not paid as a nonbusiness bad

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debt.c. J cannot deduct the $5,000 that was not paid.(no basis)d. None of the above.

18. F’s furniture business suffered a substantial property loss due to a recent earthquake. F’s insurance policy did not provide coverage for damage by an earthquake. The property, which was totally worthless after the quake, had been worth $60,000 (basis $20,000). F’s A.G.I. this year before the casualty is $90,000. F is provided some relief from his misfortune in that he may deducta. $10,900.b. $11,000.c. $20,000. (deduct the basis)d. $60,000.

19. This year D’s hunting cabin worth $5,000 (basis $8,000) was destroyed by fire. The cabin was uninsured. If D’s A.G.I. is $40,000 this year, how much of the loss may be claimed as an itemized deduction? (10% of 40,000) less 5,000 = 1000-100a. $900b. $4,000c. $4,900d. $5,000e. Some other amount

20. Which of the following cannot create a net operating loss that can be carried back or forward?a. A loss from operating a sole proprietorshipb. A casualty or theft loss to personal-use propertyc. A loss attributable to an interest in a partnershipd. A loss attributable to an interest in an S corporatione. All of the situations above can create an NOL

21. Which of the following statements regarding the net operating loss provisions is false?a. The provisions generally allow a loss in one year to offset income in other years.b. Personal and dependent exemptions are deducted in computing the net operating loss deduction.c. A net operating loss may be carried back three years and forward until it is exhausted.d. In lieu of carrying back a loss, the taxpayer may elect to carry the loss forward.e. More than one but less than all of the statements above are false.

22. H and M, married with two dependent children, operate a piano and organ store. Their records for the current year revealed the following:

Gross income from sales $175,000Business operating expenses 250,000 -

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Interest income from investment 6,000 Interest expense on home mortgage 9,000Long-term capital gain (business) 3,000 Long-term capital loss (business) 3,500

Their net operating loss for the year isa. $75,000.b. $75,500.c. $78,500.d. $82,000.

23. A medical expense deduction is allowed for all of the following items excepta. treatment affecting any function of the body.b.expenditures for prescription medicines or drugs.c.expenses paid for transportation essential to the rendition of medical care.d.expenses for health club membership.e.medical care insurance premiums for taxpayer and dependents

24. P, a single taxpayer, had $12,000 of deductible medical expenses in 2010. His 2010 A.G.I. was $24,000. His insurer reimbursed P for $11,000 of the expenses in 2011, and did not reimburse P for any expenses during 2010. If P deducted all of his allowable medical expenses on his 2010 return, how much of the reimbursement must be included in gross income for 2011? (P’s itemized deductions for 2002 exceeded his standard deduction by $15,000.)a. $0b. $900c. $10,000d. $10,200 24,000 *.075= 1800 ---- 12000-1800 = 10200 e. $11,000

25. The real property taxes on R’s house are computed on a calendar year basis and are due November 1st of each year. The realty taxes on R’s house were $2,400 for 2010. R sold his house on June 1, 2010, before the property tax payment was due. How much of these real property taxes are apportioned to and deductible by R as an itemized deduction on R’s 2010 Federal income tax return?a. $0b. $993c. $1,407d. $1,999e. $2,400

26. To deduct a contribution to a charitable organization, the organization could be any one of the following excepta. a war veterans’ organization.b. a corporation operated for scientific purposes.c. a nonprofit volunteer fire company.d. a needy family.e. a state-supported university.

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27. Which of the following is not deductible as a charitable contribution?a. Unreimbursed auto expenses on church business.b. Reasonable lodging costs while away from home overnight on business for a qualified charitable organization.c. Fair market value of appreciated stock held for five months and given to a church.d. Fair market value of used clothing given to the Salvation Army.e. Fair market value of land held as an investment for ten years and given to a church.

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