Deck 3: Business Income and Expenses, Part I

Question 1

Generally, for an activity to be treated as a trade or business, which of the following is required:​

A)​Always generate a profit
B)No more than intermittment effort toward the activity
C)​Regular and continual effort designed to seek profit
D)​Organization as a corporation or partnership

Answer 1

C

Question 2

Patricia is a business owner who is trying to determine her cost of goods sold for 2015. She bought 20 units of inventory at $11, then 26 units at $10, and finally 18 units at $14. She sold 30 units at an average price of $16 per unit in 2015 and uses FIFO for her inventory valuation. What was her cost of goods sold in 2015, assuming that there was no inventory at the beginning of the year? ​

A)$320
B)$330
C)$480
D)$732
E)None of the above

Answer 2

A

Question 3

Jasper owns a small retail store as a sole proprietor. The business records show that the cost of the store's inventory items has been steadily increasing. The cost of the end of the year inventory is $200,000 and the cost of the beginning of the year inventory was $250,000. Jasper uses the FIFO method of inventory valuation. Which of the following statements is true? ​

A)Jasper purchased more inventory during the year than he sold during the same one-year period.
B)Jasper would have a higher net income if he used the LIFO method of inventory valuation instead of the FIFO method.
C)Jasper has apparently decreased the volume of items in his ending inventory as compared to the number of items in his beginning inventory.
D)Since the cost of the store's inventory items is increasing, Jasper will have a greater cost of goods sold figure under FIFO than LIFO.
E)None of the above.

Answer 3

C

Question 4

Janine is a sole proprietor owning a small specialty store. The business records show that the cost of the store's individual inventory items has been steadily increasing. The cost of the end of the year inventory is $125,000 and the cost of the beginning of the year inventory was $150,000. Janine uses the LIFO method of inventory valuation. Which of the following statements is true? ​

A)Janine purchased more inventory during the year than she sold during the same one-year period.
B)Janine would have a higher net income if she used the FIFO method of inventory valuation instead of the LIFO method.
C)Janine has apparently increased the volume of items in her ending inventory as compared to the number of items in her beginning inventory.
D)Since the cost of the store's inventory items is increasing, Janine will have a smaller cost of goods sold amount on a LIFO basis than on a FIFO basis.
E)None of the above.

Question 5

Stone Pine Corporation, a calendar year taxpayer, has ending inventory of $150,000 on December 31, 2015. During the year, the corporation purchased additional inventory of $375,000. If cost of goods sold for 2015 is $470,000, what was the beginning inventory at January 1, 2015? ​

A)$55,000
B)$245,000
C)$255,000
D)$310,000
E)None of the above

Question 6

Brandi operates a small business and employs three staff members, all of which perform the same tasks with more or less the same level of skill. Two of the staff members are paid wages of $10 per hour; however, the third staff member, Whiski, is Brandi's sister and earns $17 per hour. What amount per hour can Brandi deduct for ​wages paid to Whiski?

Question 7

In the current year, Johnice started a profitable bookkeeping business as a sole proprietor. Johnice made $38,000 in her first year of operation. What two forms must Johnice file for her business?

A)Schedules A and C
B)Schedules D and E
C)Schedule SE and C
D)Schedules B and C
E)None of the above

Question 8

The taxpayer must use either the FIFO or LIFO method of valuing inventory, depending upon which method reflects the actual goods the taxpayer has on hand.

Question 9

What income tax form does a self-employed sole proprietor usually use to report business income and expense?

A)Schedule A, Miscellaneous Itemized Deductions
B)Schedule B
C)Schedule C
D)Form 2106, Employee Business Expenses
E)None of the above

Question 10

A taxpayer who adopts the LIFO method of inventory valuation for tax purposes may use the FIFO method for preparing financial statements.

Question 11

Once the election to use the LIFO inventory method has been made by a taxpayer, the inventory method may be changed only with the consent of the IRS.

Question 12

To file a Schedule C-EZ, the taxpayer must:

A)Have gross receipts of $25,000 or less from the business.
B)Have business expenses of $5,000 or less.
C)Have inventory of less than $2,000 during the year.
D)Have no more than 2 businesses.
E)Have no more than 5 employees during the year.

Question 13

Which of the following is not a test to deduct business expenses:

A)​The expense must be ordinary and necessary
B)​The expense must have a legitimate business purpose
C)​The expense must be reasonable
D)​The expense must be lavish and extravagant

Question 14

Schedule C or Schedule C-EZ may be used to report the net profit or loss from a partnership with business expenses of $2,500 or less.

Question 15

Acacia Company had inventory of $300,000 on December 31, 2015. Other information is as follows: ​
Purchases $1,500,000
Sales 1,800,000
Inventory 1/1/2015 500,000
​
What is the amount of Acacia's cost of goods sold for 2015?

A)$200,000
B)$1,600,000
C)$1,700,000
D)$1,800,000
E)None of the above

Question 16

When a taxpayer uses the FIFO inventory valuation method, the assumption on which the method is based is that the inventory on hand at the end of the year consists of the most recently acquired items.

Question 17

What is the purpose of Schedule C?

Question 18

Maria runs a small business out of her home. She has expenses of $2,000 per year and uses the cash basis method of accounting. Her only employee is her cousin who works for her part-time. What form should she use to report her business income?

A)Schedule A
B)Schedule C
C)Schedule F
D)Schedule C-EZ
E)Schedule B

Question 19

Peter is a self-employed attorney. He gives the following information about his business to his CPA for use in preparing his 2015 tax return:
Peter also drove his car 5,191 miles for business and used the standard mileage method for computing transportation costs. How much will Peter show on his Schedule C for 2015 for:
a.Income
b.Tax deductible expenses
c.Taxable income

Question 20

Lew started a business writing a popular syndicated Japanese gardening column in the current year and will report a profit for his first year. His results of operations are as follows:
What is the net income Lew should show on his Schedule C? Show the calculation of his taxable income.

Question 21

Deductible transportation expenses:

A)Include meals and lodging.
B)Include only costs incurred while away from home.
C)Do not include the normal costs of commuting.
D)Do not include daily expenses for transportation between the taxpayer's home and temporary work locations if the taxpayer has a regular place of business.

Question 22

Paul is a self-employed investment adviser who uses his automobile for business. Paul drove his automobile a total of 20,000 miles during 2015; 75 percent was business mileage. The actual cost of gasoline, oil, depreciation, repairs, and insurance for the year was $6,200.
a.How much is Paul's transportation deduction based on the standard mileage method?
b.How much is Paul's transportation deduction based on the actual cost method?
c.​
Which method should Paul use to calculate his transportation deduction, assuming he used the standard mileage method in 2014? Why?
d.Where should he deduct the transportation expense on his 2015 tax return?

Question 23

Once a taxpayer uses the standard mileage method to determine the deduction for automobile expenses for the tax year, the standard mileage method must be used in all subsequent years.

Question 24

If the taxpayer does not maintain adequate records of the car expenses (i.e., gas, tires, car insurance, etc.), the standard mileage rate cannot be used.

Question 25

The cost of transportation from New York to London for a trip that is for both business and pleasure may be deducted in full as a travel expense.

Question 26

Vinnie has a small retail store and sells one product. His beginning inventory consisted of 1,000 products at $4 each for a total of $4,000. During the year, Vinnie made the following purchases of the product:
March 1 5,000 products at $5 each = $25,000
August 1 1,000 products at $6 each = $ 6,000
​
Vinnie uses the FIFO method of inventory valuation and he sells 5,000 products during the current year.
a.Calculate the total cost of goods available for sale.
b.Calculate the cost of the ending inventory.
c.Calculate the cost of goods sold.

Question 27

Which of the following taxpayers may not use the standard mileage method of calculating transportation costs?

A)A self-employed CPA who drives a computer-equipped minivan to visit clients.
B)A taxpayer who has a fleet of 10 business automobiles.
C)A real estate salesperson who drives a $70,000 Mercedes while showing houses.
D)An attorney who uses his Yaris for calling on clients.
E)All of the above taxpayers may use the standard mileage method.

Question 28

If an employee is transferred to a distant location for an indefinite period of time, the new location typically will be considered the employee's new tax home.

Question 29

Barry is a self-employed attorney who travels to New York on a business trip during 2015. Barry's expenses were as follows: How much may Barry deduct as travel expenses for the trip?

A)$0
B)$950
C)$1,000
D)$1,050
E)None of the above

Question 30

Christine is a self-employed tax accountant who drives her car to visit clients occasionally throughout the year. She drives her car 1,000 miles for business, 5,000 miles for commuting and 5,000 miles for personal use. Assuming that Christine uses the standard mileage method, how much is her auto expense for the year? Where in her tax return should Christine claim this deduction?

Question 31

Rick is a business adviser who lives in Escondido, California and works in San Diego. He makes a 70-mile round trip commute to his job every workday, for a total of 14,000 miles a year. In addition, he drives 1,000 miles throughout the year to visit clients from his office in San Diego. If Rick uses the standard mileage method for computing automobile expenses, what is his automobile expense deduction for 2015?

Question 32

The IRS has approved only two per diem methods to substantiate travel expenses, the high-low method and the meals and incidental expenses method.

Question 33

If a taxpayer works at two or more jobs during the same day, he or she may deduct the cost of transportation from one job to the other.

Question 34

The standard mileage rate for automobiles in 2015 is 56 cents per mile.

Question 35

For an expense to qualify as a travel expense, the taxpayer must be away from home for at least 24 hours.

Question 36

If a taxpayer takes a trip within the United States which is primarily for business, the cost of travel to and from the destination need not be prorated between the business and personal portion of the trip.

Question 37

Vinnie has a small retail store and sells one product. His beginning inventory consisted of 1,000 products at $4 each for a total of $4,000. During the year, Vinnie made the following purchases of the product:
March 1 5,000 products at $5 each = $25,000
August 1 1,000 products at $6 each = $ 6,000
​
Vinnie uses the LIFO method of inventory valuation and he sells 5,000 products during the current year.
a.Calculate the total cost of goods available for sale.
b.Calculate the cost of the ending inventory.
c.Calculate the cost of goods sold.

Question 38

Greg, a self-employed plumber, commutes from his home to his office which is 10 miles away. He loads his truck for the day with the parts that he needs. Then he is off to see his first customer of the day, Mr. Smith. Mr. Smith is 5 miles away from the office. After Mr. Smith's job, Greg goes to his next plumbing client, Martin's Dry Cleaning, which is 21 miles away from Mr. Smith. Greg spends the rest of the day at Martin's Dry Cleaning. From Martin's Dry Cleaning, Greg goes home which is now only 7 miles away. How much can Greg count as deductible transportation miles? ​

A)None of it
B)21 miles
C)26 miles
D)43 miles

Question 39

Curt is self-employed as a real estate salesman and drives his car frequently to take clients to see homes for sale. Curt drove his car 20,000 miles for business purposes and 25,000 miles in total. His actual expenses for operating the auto including depreciation are $10,000 since he drove it so much during the year. Curt has used the actual cost method since he started his business in 2013. How much is Curt's deductible auto expense for the year?

Question 40

Chris opens a chiropractic office in Houston on January 1, 2015. In 2015, Chris drives a total of 4,200 miles from his office to clients' homes to do chiropractic adjustments. In addition, he drives a total of 3,000 miles for commuting between his home and his office in 2015. He elects to use the standard mileage method. On January 1, 2015, Chris purchases an annual subscription to a chiropractic journal for $200 and a 1-year medical reference service for $500. Calculate Chris's deduction for the above items for the 2015 tax year.

Question 41

Taxpayers who make a combined business and pleasure trip:

A)Must allocate the travel cost between the business and pleasure parts of the trip if the travel is within the United States.
B)Must allocate the travel cost between the business and pleasure parts of the trip if the travel is outside the United States.
C)Can deduct the cost of meals, lodging, local transportation, and incidental expenses in full.
D)Can take a tax deduction only for the personal part of the trip.

Question 42

Which of the following items incurred while on travel is not considered a travel expense?

A)The cost of meals
B)The cost of lodging
C)Transportation costs
D)Cost of entertaining clients
E)None of the above

Question 43

The expense of a sales luncheon may be deductible (50 percent in 2015) even if no sale is made.

Question 44

Which of the following expenses, incurred while on travel, does not qualify as a travel expense?

A)Tips
B)Dry cleaning of suit
C)Dinner at a steak house
D)Gift purchased for a prospective customer ($20)
E)None of the above

Question 45

Carlos drives to Oregon to consult with a client. He works for 1 day and spends 3 days enjoying Oregon since the consultation was right before a 3-day weekend. His expenses were $175 to drive to Oregon and back, $600 for lodging, $50 for food on the day that he worked, and $125 for food on the other 3 days. How much of his travel expenses are deductible?

A)$0
B)$175
C)$200
D)$350
E)$800

Question 46

Mikey is a self-employed computer game software designer. He takes a week-long trip to Maui, primarily for business. He takes 2 personal days at the beach. How should he treat the expenses related to this trip?

A)None of the expenses are deductible since there was an element of personal enjoyment in the trip.
B)100 percent of the trip should be deducted as a business expense since the trip was primarily for business.
C)50 percent of the trip should be deducted as a business expense.
D)The cost of all of the airfare and the expenses related to the business days should be deducted, while the expenses related to the personal days are not deductible.

Question 47

Sally and Martha are tax accountant partners operating a tax firm in San Diego. Every year, they attend the Tax Planning Forum in Las Vegas featuring nationally renowned tax experts. The Forum lasts for 2 days. One evening Sally and Martha attend a show and another evening they lose $10 gambling on the nickel slot machines. Their expenses are as follows:
Calculate the firm's educational expense deduction for the current year.

Question 48

Girard is a self-employed marketing consultant who spends significant time entertaining potential customers. He keeps all the appropriate records to substantiate his entertainment. He has the following business-related expenses in the current year.
What is the tax deductible entertainment expense Girard may claim in the current year. On which tax form should he claim the deduction?

Question 49

During 2015, Harry, a self-employed accountant, travels from Kansas City to Miami for a 1-week business trip. While in Miami, Harry decides to stay for an additional 5 days of vacation. Harry pays $600 for airfare, $200 for meals, and $500 for lodging while on business. The cost of meals and lodging while on vacation was $300 and $500, respectively. How much may Harry deduct as travel expenses for the trip?

A)$600
B)$1,100
C)$1,200
D)$1,300
E)None of the above

Question 50

Gary is a self-employed accountant who pays $2,000 for business meals. How much of a deduction can he claim for the meals and where should the deduction be claimed?

A)50 percent, miscellaneous itemized deduction
B)50 percent, Schedule C deduction
C)100 percent, miscellaneous itemized deduction
D)100 percent, Schedule C deduction

Question 51

Linda is self-employed and spends $600 for business meals and $900 for business entertainment in 2015. What is Linda allowed to deduct in 2015 for these expenses?

A)$600
B)$750
C)$800
D)$1,000
E)None of the above

Question 52

If a per diem method is not used, which of the following items is not required as substantiation for the deduction of a travel expense?

A)Amount spent
B)Destination
C)Business reason for the trip
D)Departure and return dates
E)All of the above must be substantiated

Question 53

Jack is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in meals, and $2,000 in green fees to entertain clients. He is also a member of the local Rotary club where he meets potential clients. The dues for the Rotary club are $1,200 a year. How much of the above expenses can Jack deduct as business expenses?

A)$4,200
B)$6,000
C)$7,200
D)$14,400
E)None of the above

Question 54

Choose the correct statement:

A)If a taxpayer does a lot of business travel, the taxpayer may deduct the amount paid for an airline club membership.
B)Membership dues to a golf club are deductible as long as there is a business purpose.
C)In order to be deductible, dues and subscriptions must be related to the taxpayer's occupation.
D)If a financial planner becomes certified, then he/she may not deduct the Certified Financial Planner (CFP) dues because it is not necessary to be certified in order to engage in the business of being a financial planner.

Question 55

Taxpayers who use their country club more than 50 percent for business may deduct the total amount of their membership dues.

Question 56

David purchases a yacht solely for the purpose of entertaining real estate clients. He wishes to position himself as a high-end real estate salesperson specializing in very expensive residences and uses the yacht only for business entertainment. During 2015, his expenses for maintaining the yacht, including depreciation, were $28,000. In addition, he incurred $9,000 of catering expenses for meals he provided to business clients on the yacht. What is David's tax deduction in 2015?
​
Explain.

Question 57

Ruth is a self-employed surgeon and is required to take a week of continuing medical education every year to keep her license. This year she paid $2,000 in course fees for her continuing medical education in Honolulu. She also paid $1,500 for airfare and a hotel room and $400 for meals. What is the total amount she can deduct on her Schedule C related to these expenses?

Question 58

If an employer chooses a per diem method of substantiation for travel expenses,

A)The Regular Federal Rate method allows employees the same per diem rate no matter where they travel in the United States.
B)The high-low method averages the high-cost locality and low-cost locality per diem rates to arrive at an average rate.
C)The meals and incidental expenses method requires actual cost records to substantiate lodging expenses.
D)Actual expense records substantiating the business reason for the trip and the dates of arrival and departure are not required.
E)The employer need not use an accountable plan for reimbursing employees for travel expenses.

Question 59

Dennis, the owner of Dennis Company, incurs the following expenses while away from home on a 3-week business trip during 2015:
In addition to the above expenses, Dennis incurred the following expenses for a weekend sightseeing trip to Washington D.C.: ​ Calculate the amount Dennis may deduct for 2015 as travel expenses for the trip.
Calculate the amount Dennis may deduct for 2015 as entertainment.
Calculate the amount Dennis may deduct for 2015 as business gifts.

Question 60

Mary is an insurance salesperson and a member of the Country Club. During 2015, Mary used the club 40 percent for entertaining clients (directly-related use) and 60 percent for pleasure. She incurred the following expenses at the Country Club:
Calculate the amount that Mary is allowed to deduct as entertainment expense.

Question 61

Which of the following is deductible as dues, subscriptions or publications?

A)Dues to a health club for a doctor
B)Subscription to "Vogue" magazine for a corporate president
C)Dues to the drama club for a student
D)Subscription to the "Journal of Taxation" for a tax attorney
E)None of the above

Question 62

Indicate which of the following dues, subscriptions, and publications are deductible and which are not deductible:
1. Subscription to "The New England Journal of Medicine" for an electrician
2. Ford truck shop manual for an auto mechanic
3. Subscription to "Shape" magazine for an aerobics teacher
4. Dues for a hairstyle video club for a hairdresser
5. Movie of the Month club for an appraiser

Question 63

Which of the following does not give rise to a business expense for uniforms or special clothing?

A)A lawyer buys a business suit.
B)A mascot buys his costume.
C)A baseball player buys his team uniform.
D)A scientist buys his hazmat suit.
E)All of the above are deductible.

Question 64

Terry is a policeman employed by the city. He must purchase and maintain his uniforms. The total cost of purchasing and maintaining uniforms is $1,000 for the current year. How much may he deduct, why, and where on his tax return?

Question 65

​Teachers at the kindergarten through high school level may deduct up to $200 of education supplies and materials cost each year ($400 married filing jointly).

Question 66

The cost of a blue wool suit for an accountant is a deductible expense.

Question 67

​Wanda is a single taxpayer and an elementary school teacher. She also tutors students in her home as a small business. During 2015, Wanda purchased $200 in school supplies for her classroom. She also purchased $400 in supplies and materials for her tutoring business. Lastly, she uses a 200 sq. ft. spare bedroom in her house to tutor her clients. Occasionally, her mother also stays in that room during holidays. If Wanda elects to use the simplified method for her home office and the educator's expense is extended for 2015, what are her deductions based on the information provided (ignore any income limitations)?

Question 68

The cost of a subscription to the New England Journal of Medicine is a deductible expense for a hospital intern.

Question 69

In which of the following situations may the taxpayer take an education expense on Schedule C?

A)John, a plumber by trade, is taking classes to qualify as an electrician so he may take on more complex contrator jobs.
B)Henry, an administrative assistant, is taking an advanced Word computer program class through an adult school program.
C)Barbie is flying on numerous commercial airplanes in order to observe the flight attendants so that she may improve her public relations skills.
D)Ann Marie is taking a review course in order to pass the certified financial planner examination.

Question 70

The expense of travel as a form of education is not deductible.

Question 71

There is a limitation of $25 per donee on the deduction of gifts to employees for length of service.

Question 72

To be deductible as the cost of special work clothing or uniforms:

A)The clothing must not be suitable for everyday use and must be required as a condition of the job.
B)The clothing must be required as a condition of the job, but can also be suitable for everyday use.
C)The clothing need not be required as a condition of the job, but must not be suitable for everyday use.
D)Only the cost of the clothing is included; upkeep is not deductible.

Question 73

Michael has a very successful business as a financial consultant. Michael attends the following seminars:
How much can Michael deduct as business education expenses?

Question 74

​Sally is a high school math teacher. In 2015, she purchases $400 worth of supplies related to her teaching. Her spouse, Gabe, is a high school math teacher and spends $100 in education supplies for his classes. If married filing jointly, what is the for-AGI educator's expenses deduction, assuming the 2014 law is extended into 2015?

A)​$0
B)​$250
C)​$350
D)​$500
E)​None of the above

Question 75

Paul is a general contractor. How much of the following expenses may Paul deduct?
​

Question 76

Choose the correct answer.

A)Education expenses are deductible on Schedule C even if the education qualifies the taxpayer for a new trade or business.
B)Expenses required for education to maintain skills for the taxpayer's current business are not deductible.
C)The cost of a CPA review course is deductible by a bookkeeper on his Schedule C.
D)Expenses for travel as a form of education are not deductible.

Question 77

Carol, a CPA, is always required by her employer to wear to work either a gray or a blue business suit with matching shoes. Carol would never consider wearing her gray or blue suits and matching shoes anywhere other than work since she considers them uncomfortable as well as unattractive. Can Carol deduct the cost of the suits and shoes as special work clothing or uniforms? Explain.

Question 78

Natasha is a self-employed private language tutor. In 2015, she obtained her teaching credentials, hoping to receive a job as a seventh grade public school English teacher. She had the following education expenses for the year:
Natasha also attended a seminar in Washington, D.C., titled "The Motivated Student." Her expenses for the trip are as follows: Determine how much of the above expenses are deductible on her Schedule C.

Question 79

A business gift with a value of $35 presented to a client and his nonclient spouse is fully deductible by the donor.

Question 80

A gift to a foreman by a worker is considered business related and therefore subject to the $25 limit.