Deck 5: Introduction to Business Expenses

Question 1

An expense that is incurred for the production of rent will be deducted for adjusted gross income.

Answer 1

False

Question 2

Morgan, a banker, is an amateur photographer who takes pictures at weddings and parties. He earned $1,000 but incurred $1,200 in related expenses. Since he takes a standard deduction, he will have to include the $1,000 in income but will not get any benefit from the expenses.

Answer 2

True

Question 3

Bowen is planning to quit his job as a plumber and open a paint store. He has incurred expenses of $8,000 dealing with the opening of the store and will be able to deduct all of these expenses.

Answer 3

True

Question 4

To be deductible, the dominant motive for incurring an expense must be

A) the relationship to a business activity.
B) to reduce income taxes.
C) tax avoidance.
D) the intent to earn a profit.
E) personal.

Question 5

Andy lives in New York and rents his house for two weeks during the U.S. Open Tennis tournament for $3,500. He must include the rent in his income.

Question 6

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

Question 7

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

Question 8

Ona is a professional musician. She prepared her music teacher's tax return in exchange for music lessons. Since she is a cash basis taxpayer, she cannot take a deduction for the music lessons.

Question 9

John decides rather than work late in the office, he does all of his work in an office at home. His employer approves of this arrangement. Since John uses his home office on a regular and exclusive basis, he will be eligible to take a home office deduction even though it was not required as a condition of employment.

Question 10

Teresa, Terri, and Tricia operate Sassy Solutions, an exclusive boutique. Based on advice from Teresa's sister, a CPA, the three form a partnership. Teresa owns 50% and Terri and Tricia each own 25%. For the year, Sassy Solutions reports the following: For tax purposes, what amount will Sassy Solutions report to Teresa as her ordinary income from the partnership?

A) $144,000
B) $146,000
C) $148,000
D) $138,000
E) $140,000

Question 11

An individual is indifferent whether an expense is deducted for or deducted from adjusted gross income.

Question 12

For a taxpayer to be engaged in a trade or business, the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Question 13

A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

Question 14

In order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

Question 15

In order for a taxpayer to reduce taxable income with a deduction, the tax law must allow it, and it must meet all statutory requirements.

Question 16

Devery, Inc. sells high tech machine parts that are fully warranted against defects. Based on prior years experience they can expect to incur $20,000 of warranty expense on current sales. They are on the accrual basis, and the warranty expense is based on a reasonable estimate, so Devery can deduct the $20,000.

Question 17

Tom, Dick, and Harry operate Quality Stores. Based on advice from Tom's sister, a CPA, the three form a partnership. Tom owns 50%; Dick and Harry each own 25%. For the year, Quality Stores reports the following: By how much will Tom's adjusted gross income increase because of the above?

A) $178,000
B) $180,000
C) $183,000
D) $184,000
E) $186,000

Question 18

Pamela owns the building where her plumbing supply business is located. This year she put on vinyl siding to replace the weathered wood siding on her building. The cost of the new siding can be expensed in the current year.

Question 19

Which of the following is an example of a business purpose as dominant motive? Darren is a full-time plumber and a part-time Amway salesman. He is taking his family to I. II. Disney World and plans to take his Amway products with him so that he may deduct most of his cost of the trip. Larry is a full-time plumber. He is taking his family with him to a convention in Orlando featuring the latest in plumbing products and techniques. He plans to deduct most of his cost of the trip.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 20

The Business Purpose Concept means I. that the economic purpose of the transaction must exceed the tax avoidance motive. II. that the taxpayer's dominant motive for an expenditure is to reduce taxation.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 21

Pedro owns 5 rental properties. He contracts with East Lake Properties, Inc., to manage the real estate. East Lake obtains tenants, negotiates leases, makes necessary repairs, pays expenses related to the properties, and remits monthly net receipts to Pedro. I. Pedro's sale of the properties at a gain will result in a capital gain. II. Pedro's sale of the properties at a loss results in an ordinary loss on his tax return.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 22

Business expenses include I. expenditures that have a business purpose II. expenditures that are incurred for the production of income.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 23

An ordinary expense I. is an expense commonly incurred in an income-producing activity. II. is an expenditure that provides future benefits to an income-producing activity.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 24

During 2014, Myca sells her car for $5,000. She acquired the car in 2010 for $11,000 and has used it 60% for business and 40% for personal use. She deducted $5,280 in depreciation. What is the taxable gain or loss from the sale of the car attributable to her business use?

A) $3,680 gain
B) $ 432 gain
C) $ 720 loss
D) $2,280 loss
E) $1,680 gain

Question 25

Sheila extensively buys and sells securities. The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore, Shelia must be

A) a broker.
B) an active trader.
C) an active investor.
D) a securities' dealer.

Question 26

An ordinary expense I. is normal, common, and accepted under the circumstances of the business community. II. is an expense commonly incurred in an income-producing activity.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 27

Three requirements must be met in order to deduct a trade or business expense. Also, deductible trade or business expenses may not be which of the following: I. a capital expenditure. II. reasonable in amount. III. a payment that frustrates public policy. IV. an expense related to tax-exempt income.

A) Only statement I is correct.
B) Only statement II is correct.
C) Statements III and IV are correct.
D) Statements I, II, and III are correct.
E) Statements I, III, and IV are correct.

Question 28

Which of the following people is currently engaged in a trade or business? Barry spends 4 hours a day 5 days a week managing his investment portfolio. He watches I. II. the market and buys and sells securities when he thinks the market is right. His investment strategy is to realize income from dividends and long-term gains from holding investments for appreciation in value. Jennifer is a full-time realtor, and she owns a house that she rents to Barry and his family for $900 a month. Jennifer provides for the repairs and maintenance of the house, and she stops by monthly to collect the rent and visit with Barry and his family.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 29

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include I. Personal expenses. II. Trade or business expenses. III. Expenses for the production of income.

A) Statements I and II are correct.
B) Statements I and III are correct.
C) Statements I, II, and III are correct.
D) Statements II and III is correct.

Question 30

Which of the following individuals is involved in a trade or business? Lil owns a farm near Lafayette, Indiana. She leases the property to Cal, who operates the I. II. farm for himself. Lil receives 10% of Cal's net income as part of the lease agreement but has no responsibilities for the farming operation. Lorraine owns a warehouse located in Brooklyn NY. She paid $250,000 for the real estate several years ago. It is now appraised at over $1,000,000, but she still uses the building only to store her painting collection.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 31

Which of the following is/are trade or business expenses? I. Solly incurs legal expenses related to real estate he leases to Bucko Burger Hamburger Haven for a parking lot. Solly does little but negotiate the lease every year.. II. Susan owns several rental apartments. She negotiates new rental contracts, arranges for repairs and maintenance, and handles all leasing activities.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 32

In the current year, Paul acquires a car for $16,000. He uses the car in his advertising business and for personal purposes. His records indicate the car is used 60% for business and that the total operating expenses, including depreciation, are $4,700. Paul expects to use the car for 5 years in his business. What amount can Paul deduct as the operating costs of the car?

A) $ - 0 -
B) $ 2,400
C) $ 2,820
D) $ 4,700
E) $12,000

Question 33

A business expense includes I. an expenditure that satisfies the dominant profit-motive requirement. II. an expenditure that is incurred in a trade or business activity.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 34

Shaheen owns 2 rental properties. She hires her 21 year old son, who is a junior at State College, to obtain tenants, negotiate leases, make arrangements for repairs, and pay expenses related to the properties. I. Shaheen's sale of the properties will result in a capital gain or loss. II. Shaheen's sale of the properties at a loss results in a current-year loss deduction of no more than $3,000.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 35

Marian, a schoolteacher in Duluth, Minnesota, owns a rental house in Scottsdale, Arizona. She travels to Arizona during spring break to inspect her property and discuss property improvements with the tenant and property manager. Marian's brother, Brian, lives in Scottsdale. She stays at his house during her week in Arizona and borrows his car to travel across town for her day of meetings. Her trip accomplishes several objectives: a visit with her brother, a trip away from Wisconsin's winter weather, and a review of her investment property. The expenses of traveling to Scottsdale I. have a dominant business purpose. II. are deductible as expenses for the production of income.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 36

Which of the following people are currently engaged in a trade or business? Willie devotes 45 hours per week to betting on horse races. Although he intends to win I. II. large sums, he has failed to win the big one. He considers his betting activities his job and relies on his meager winnings to support his family. Daryl owns 214 home sites in and around Orlando, Florida. He bought these vacant lots several years ago in hoping that they would appreciate in value so he could sell them at a profit. Because of the recreational activities in the area, the building lots are worth several times his original cost. He is getting the lots ready to sell this year.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 37

Bonnie's sister, Diane, wants to open a restaurant. Because Diane is short of funds, Bonnie purchases the building and leases it to Diane. No agreement is signed, and Bonnie tells Diane not to worry about paying rent until the cash flow can support it. Also, Bonnie promises not to sell the property to anyone other than Diane. I. Any expenditures Bonnie makes regarding the building would be classified as production of income expenses. II. The building rental has the characteristics of a gift. III. The dominant motive in acquiring the building is to earn an economic benefit profit). IV. Bonnie's property tax expenses related to the property are deductible.

A) Only statement II is correct.
B) Only statement III is correct.
C) Statements I, II, and IV are correct.
D) Statements II and IV are correct.
E) Statements I, II, III, and IV are correct.

Question 38

Charlotte traveled to Annapolis to attend a three-day business conference. After her meetings concluded, she stays 2 additional days sightseeing. Charlotte's airfare is $400 and pays $110 per night for lodging, $60 a day for meals, and $20 a day for incidentals. How much of Charlotte's costs can be deducted as a business expense?

A) $ - 0 -
B) $ 400
C) $ 880
D) $ 970
E) $1,200

Question 39

Which of the following is/are trade or business expenses? Mahlon incurs expenses related to investing in stocks and bonds. Mahlon is a Sociology I. professor at State University but spends 10-15 hours per week on his investments. Almost 2/3 of Mahlon's annual income comes from his investments as dividends and interest. II. Shaheen has expenses related to managing her portfolio of securities. The short-term trading of her securities generates most of her annual income. She has no other job.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 40

Sarah extensively buys and sells securities . The IRS has determined upon examination that she is in a trade or business concerning the securities' transactions and therefore, Sarah is

A) a day trader.
B) an active trader.
C) an active investor.
D) a securities' dealer.

Question 41

Which of the following is/are currently deductible trade or business expenses? I. Membership dues to an environmental lobbying group. II. Cost of acquiring a new business automobile.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 42

Kim owns and operates a restaurant on the north side of Indianapolis. She is considering opening a day care center on the south side of town and incurs $10,400 of investigation expenses. In July of the current year, Kim opens the day care center. How much of the investigation expenses can Kim deduct in the current year?

A) $ - 0 -
B) $ 5,000
C) $ 1,540
D) $ 5,180
E) $10,400

Question 43

Jackie recently retired from the U.S. Coast Guard after 30 years of service. She would like to open a boat shop to operate in her retirement years. Jackie incurs $3,800 of expenses while investigating sites for her shop and while checking out boat franchises. What are the tax effects of the expenses Jackie incurs? I. If Jackie enters the boat business, she can deduct the costs only by capitalizing them and amortizing them over 180 months. II. They are not deductible if Jackie does not enter the ski and boat business.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 44

Which of the following expenditures are not deductible because they are personal in nature? I. Premiums paid on liability insurance for the taxpayer. II. Education costs that improves the taxpayer's skills in his/her trade or business.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 45

Which of the following payments are currently deductible? I. Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller. II. Amber's Construction Company pays the tuition for Karl's son. Karl is a local building inspector and has no other relationship with the company.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 46

Angel owns a gourmet Mexican restaurant. His head chef, Carmen, is arrested for a parole violation. Because Angel needs Carmen back to work as soon as possible, Angel pays her bail of $250, attorney's fees of $300, and a court fine of $200. I. A business purpose exists for the payments. II. If Carmen were required to repay the expenditures, it would constitute a loan and not be deductible for Angel. III. If Angel does not require Carmen to repay the amounts paid on Carmen's behalf, the payments constitute compensation and Angel gets a deduction for the expenses paid.

A) Only statement I is correct.
B) Statements I and III are correct.
C) Statements I and II are correct.
D) Statements I, II and III are correct.

Question 47

All of the following are a required test for the deduction of a business expense except?

A) GAAP approved.
B) Ordinary.
C) Necessary.
D) Business purpose.
E) Reasonable in amount.

Question 48

Kelly buys a new Lexus for $48,750 in the current year to use in her commercial real estate business. Kelly cannot deduct the cost of the automobile in the current year, because

A) it is unreasonable in amount.
B) it is not a regularly recurring item.
C) it is a capital expenditure.
D) it is not necessary

Question 49

Which of the following is a currently deductible trade or business expense.

A) $ 5,000 trustee fees paid to a bank to manage tax-exempt securities.
B) $ 12,000 fee paid to a marketing firm for a market analysis for a new business.
C) $15,000 fee paid to a TV station to advertise a new product.
D) $20,000 to an attorney to defend title to a new patent.
E) All of the above are currently deductible expenses.

Question 50

Which of the following is not deductible?

A) Expenses related to earning dividends on a portfolio of "blue chip" stocks.
B) Expenses related to interest income from municipal bonds.
C) Legal expenses related to rental real estate property.
D) Medical expenses of the taxpayer's dependent child.

Question 51

Which of the following expenditures are not deductible because they are personal in nature? I. Legal costs to acquire a personal residence. II. Losses resulting from the sale of personal residences.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 52

Diana bought 1,500 shares of Dalton Protection, Inc., common stock for $10 per share. She paid her broker a $300 commission to close the purchase. The following year, Diana sold 1,000 of the shares for $17 per share and paid a commission of $175 on the sale. What is Diana's capital gain on the sale of the stock?

A) $1,525
B) $2,000
C) $6,625
D) $6,825
E) $7,000

Question 53

Which of the following payments are currently deductible? I. Steve is a self-employed attorney. He pays another attorney $14,000 to represent him in a lawsuit that alleged that he was liable in a personal auto accident. II. Connie has an investment portfolio in excess of $600,000. She pays Chris $1,000 to do an analysis of her investments and make recommendations on restructuring the portfolio.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 54

Portia, a CPA, operates a financial and tax planning service. During the months of February, March, and April of every year, she hires graduate tax students from The University of Chicago as interns. This year she hires 4 interns. One is her brother, Sidney. She pays all interns except Sidney $20 per hour for help with tax return preparation and tax research. Sidney receives $25 an hour. She cannot deduct the full amount of Sidney's hourly wages because the expense is not

A) appropriate.
B) ordinary.
C) necessary.
D) reasonable.

Question 55

Paul owns a lumber yard in Portland. He has decided to expand his business interests and is considering opening a golf course in Seattle. He has incurred $51,000 of expenses investigating whether to open the new golf course. In January of the current year he finds the perfect location and opens the golf course on July 1. What amount of the investigation expenses can he deduct in the current year?

A) $ - 0 -
B) $ 5,100
C) $ 5,567
D) $ 6,533
E) $51,000

Question 56

Which of the following is/are currently deductible trade or business expenses? I. Personal property taxes on a hot air balloon operated as a hobby. II. Interest paid on the mortgage note on a business warehouse.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 57

Which of the following requirements does not have to be met for a business or investment expense to be deductible:

A) Be ordinary and necessary.
B) Be reasonable in amount.
C) Be recurring.
D) Be the taxpayer's own expense.
E) All of the above must be met.

Question 58

Davis owns and operates a convenience store on the north side of the city. He has always wanted to operate a sports bar. When he hears of a new shopping center development in the south part of the city, he contacts the developer and begins negotiations to open his dream enterprise. If negotiations are successful and Davis incurs $40,000 in start-up costs to open his new I. business, he can deduct up to $5,000 of the start-up costs and must capitalize the costs of investigation and start-up exceeding $5,000. II. If Davis decides not to open his bar and restaurant, the investigation expenses are fully deductible.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 59

Wanda owns and operates a restaurant on the north side of Cleveland. She is considering opening a second restaurant on the south side of town and incurs $13,600 of investigation expenses. In July of the current year, Wanda decides not to open a second restaurant. How much of the investigation expenses can Wanda deduct in the current year?

A) $ - 0 -
B) $ 5,000
C) $ 5,120
D) $ 5,600
E) $13,600

Question 60

Henry owns a hardware store in Indianapolis. He has decided to expand his business interests and is considering opening a golf store in a neighboring town. He has incurred $12,000 of expenses investigating whether to open the new golf store. In July of the current year he finds the perfect location and opens the golf store on October 1. What amount of the investigation expenses can he deduct in the current year?

A) $ - 0 -
B) $ 600
C) $ 5,117
D) $ 5,540
E) $12,000

Question 61

Which of the following factors absolutely must be present for an activity to be considered a trade or business for tax purposes?

A) The activity is profitable most of the time.
B) Taxpayer has experience in the activity.
C) Taxpayer has a mailing address and phone number for his business that is different from his personal address and phone number.
D) Taxpayer has a profit motive for engaging in the activity.
E) All of the above factors must be present to have a trade or business activity.

Question 62

Clay incurs $5,000 of investment expenses related to purchasing Renco Company stock and New Orleans municipal bonds. He receives $6,000 of dividends on the stock and $14,000 of interest on the bonds. The amount of investment expense Clay can deduct is:

A) $ - 0 -
B) $1,500
C) $2,500
D) $3,500
E) $5,000

Question 63

Bruce operates an illegal drug business. Which of the following is deductible?

A) Commissions paid to dealers.
B) Rent for a warehouse.
C) Bribes paid to local police.
D) Cost of drugs sold.
E) Interest on debt to finance the purchase of inventory.

Question 64

Which of the following production of income expenses would be deductible: I. Interest expense on loan to acquire U.S. Treasury notes. II. Interest expense on loan to acquire IBM Corporate bonds.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 65

Which of the following expenses is/are deductible? I. Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business. II. A $4,000 contribution to the mayor's campaign fund.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 66

Sadie is a full time nurse and a part time painter. Her painting qualifies as a hobby. Her gross income from painting is $7,000. Her expenses include $800 of interest on inventory loans, $5,200 of expenses in conducting business activities, and $2,000 of depreciation of equipment. Which of the following statements about Sadie's hobby activity is/are correct? I. Sadie will not recognize any taxable income as a result of her hobby. II. Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the year. III. Sadie will lose at least $1,000 of her depreciation deduction for the current year. IV. If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses.

A) Statements I and II are correct.
B) Statements II and III are correct.
C) Statements III and IV are correct.
D) Statements I, II, and III are correct.
E) Statements II, III, and IV are correct.

Question 67

During the current year, Paul came down with a serious illness. Paul's uncle paid many of Paul's expenses during the period of rehabilitation. For tax purposes, how are Paul's mortgage interest and real estate property taxes handled? I. Paul can deduct both items. II. Paul's uncle can deduct both items. III. Neither Paul nor his uncle can deduct the expenses.

A) Only statement I is correct.
B) Only statement II is correct.
C) Only statement III is correct.
D) Statements I and II are correct.

Question 68

Which of the following expenses is/are deductible? I. Transportation and lodging expenses of $3,000 incurred to monitor state legislation that may affect the taxpayer's business. II. Lobby expenses of $300 during the year to influence local town legislators to support pro- business legislation.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 69

Which of the following payments are deductible? I. Wilcox pays $1,000 to run an add in the program of the state Independent Party convention Wilcox is in the construction business. In January, he sends his chief financial officer to II. III. Washington, D.C., to monitor current legislation affecting the real estate industry. Expenses totaled $2,100. In March, Wilcox personally travels to Washington, D.C., to testify before the banking subcommittee on the effects of proposed legislation on the construction industry. Expenses totaled $2,300.

A) Only statement I is correct.
B) Only statement II is correct.
C) Only statement III is correct.
D) Statements II and III are correct.
E) Statements I and II are correct.

Question 70

Jennifer pays the following expenses for her dependent 30-year old daughter while the daughter was ill during the current year: How much of the above expenditures may Jennifer use in computing her itemized deductions?

A) $ - 0 -
B) $ 6,000
C) $ 9,000
D) $14,800
E) $17,000

Question 71

Which of the following factors are used to aid in determining whether an activity that earns income is profit motivated and should be treated as a business or is subject to the hobby loss rules? I. The taxpayer's financial status. II. Elements of personal pleasure derived from the activity.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 72

Michael operates an illegal cock fighting business. Which of the following expenses is currently deductible?

A) Fines paid to the local authorities.
B) Bribes paid to local police.
C) Rent expense on the enterprise's building.
D) Expenditures to acquire bar and kitchen equipment.
E) None of these expenses are currently deductible.

Question 73

Which of the following factors are used to aid in determining whether an activity that earns income is profit motivated and should be treated as a business or is subject to the hobby loss rules? I. The amounts of occasional profits, if any. II. Taxpayer's success in similar activities.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question 74

Which of the following expenditures or losses incurred in the context of a trade or business activity is deductible at the time it is incurred?

A) Aaron owns a local restaurant. He pays the local health inspector a fee of $125 per week, as provided by city regulation.
B) Beth owns a local delivery company and pays $750 in parking fines during the year with respect to her delivery vehicles. These fines were unavoidable in the context of her business activity.
C) Brad hires the son of the police chief as the night watchman at his business. The son is paid at the same weekly rate as other night watchmen in the area, but he does not show up for work on a regular basis.
D) Dotty owns a local nightclub that features live music. She pays $4,600 to purchase a full page ad in the local newspaper urging citizens to vote against a noise ordinance in the next election that will force her out of business if passed.

Question 75

Oscar drives a taxi on weekends. In maximizing the amount of fares he earns, he occasionally gets tickets for speeding. Oscar figures that as long as he keeps his traffic violations under $100 over a weekend, he can more than offset those costs with additional fares. What is/are the tax effects) of Oscar's speeding ticket costs?

A) The costs are deductible because they are ordinary and necessary expenses directly related to the business.
B) The costs are deductible because they have a business purpose and the business is not illegal.
C) The costs are not deductible because the business activity is illegal.
D) The costs are not deductible because they are due to violations of law.

Question 76

Walter pays a financial adviser $2,100 to help him manage his investment portfolio during the current year. Walter receives $5,000 in interest from investments in General Motors and Xerox bonds, and $2,500 in interest from investments in City of San Francisco bonds. How much may Walter deduct for the current year?

A) $ - 0 -
B) $ 700
C) $1,050
D) $1,400
E) $4,200

Question 77

Which of the following can be deducted as a trade or business expense?

A) Lobbying expenses to influence taxpayers.
B) Political contribution to elect a local Congressman.
C) Illegal bribes to government
D) Rent paid on a office to run an illegal gambling operation.
E) None of the above can be deducted.

Question 78

Virginia, a practicing CPA, receives $11,000 from the sale of rare orchids that she grows. Her expenses of operating this hobby activity follow: How much of the expenses that Virginia incurs can be deducted as hobby expenses?

A) $ - 0 -
B) $ 4,500
C) $11,000
D) $12,500
E) $17,500

Question 79

Several factors are used to determine whether an activity is classified as a hobby or as a business. Which of the following are factors that aid in this determination? I. The financial status of the taxpayer II. The expectation that the assets involved in the activity will increase in value. III. The taxpayer's success in similar activities. IV. The amount of personal pleasure and enjoyment that accrues to the taxpayer.

A) Only statements II, III, and IV are correct.
B) Only statement III is correct.
C) Statements I, II, and III are correct.
D) Only statement IV is correct.
E) Statements I, II, III, and IV are correct.

Question 80

Chelsea operates an illegal gambling enterprise out of her restaurant. Considering only the following expenses, what amount can Samantha deduct?