Question 1

Paul, a business consultant, regularly takes clients and potential clients out to dinner. In order to deduct these expenses, Paul must maintain records substantiating all of the following except

Accepted Answer

Paul must maintain records substantiating the business purpose, time and place, and business relationship for the dinners to deduct the expenses. Therefore, all of the above information must be substantiated.

Question 2

Troy incurs the following expenses in his business, an illegal gambling establishment:  His deductible expenses are

Accepted Answer

The answer of Troy incurs the following expenses in his...

Question 3

Points paid in connection with the purchase of a principal residence may be deducted in the year paid.

Accepted Answer

Points paid in connection with the purchase of a principal residence can generally be deducted in the year paid, subject to certain limitations and qualifications.

Question 4

Desi Corporation incurs $5,000 in travel, market surveys, and legal expenses to investigate the feasibility of open new coffee house in one of the new suburban malls in town. Desi already owns a similar coffee house downtown
a. What is the proper tax treatment of these expenses if Desi decides not to open the new coffee house?
b. What is the proper tax treatment of these expenses if Desi decides to open the new coffee house?
c. Assume that Desi Corp is currently in the cleaning services business and incurs the noted expenses because i considering opening a coffee house. Reconsider your responses to parts a and b.

Accepted Answer

The answer of Desi Corporation incurs $5,000 in travel, market...

Question 5

Expenses paid with a credit card are deductible at the time a cash- basis taxpayer pays for the charge.

Accepted Answer

The answer of Expenses paid with a credit card are...

Question 6

What must a taxpayer do to properly document a deductible travel or client business meal expense?

Accepted Answer

The answer of What must a taxpayer do to properly...

Question 7

Tory considered opening a cupcake store in Denver. Tory is currently a full- time dentist. After spending $8,600 on a market study, he decided against opening the store on August 1. What is the maximum amount of deduction for the current year attributable to this expenditure?

Accepted Answer

Since Tory decided not to open the business, the expenditure is considered a personal expense and is not deductible.

Question 8

Pat, an insurance executive, contributed $1,000,000 to the reelection campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct?

Accepted Answer

Contributions to political campaigns are not tax-deductible according to IRS rules.

Question 9

Business interest expense is limited for larger businesses. Which of the following statements is not correct with respect to this limitation?

Accepted Answer

The limitation applies to businesses with average annual gross receipts exceeding $25 million, not $10 million.

Question 10

In March of the current year, Marcus began investigating the possibility of opening a specialty clothing store. From March through June, he spent $2,300 on a market survey, $2,700 in consulting fees to find the best location and $3,600 in professional fees setting up an accounting and inventory system. Although he had never run his own business before, on August 1 he opened his doors for business. What is the maximum amount of deduction for the current year attributable to these expenditures?

Accepted Answer

The maximum amount of deduction for the current year attributable to these expenditures is $5,100. This is because the costs of the market survey, consulting fees, and professional fees are all considered start-up costs, which are amortized over a period of 60 months. The maximum amount of start-up costs that can be amortized in the first year is $5,000, plus an additional $100 for each month that the business is in operation during the first year. In this case, the business was in operation for 5 months during the first year, so the maximum amount of start-up costs that can be amortized in the first year is $5,100.

Question 11

Rachel, a self- employed business consultant, has significant expenses for travel business meals with clients in her work, but she has not kept receipts. She will be able to deduct a reasonable amount of these ordinary and necessary expenses under the Cohan rule.

Accepted Answer

The answer of Rachel, a self- employed business consultant, has...

Question 12

A small business uses the accrual method of accounting for its financial statements. It must also use the accrual method for computing taxable income.

Accepted Answer

Although using the accrual method for financial statements is important for accurate reporting of a company's financial position, small businesses can choose to use the cash method or hybrid method for tax purposes as long as they meet certain eligibility criteria. The accrual method is not required for computing taxable income.

Question 13

2020 Enterprises, owned by Xio who also manages the businesses, has generated more than $25 million of sales f of the past five years. This year it is reporting the following income and deduction amounts:  Xio just received a statement from the bank reporting interest expense of $1,800,000 on a loan to 2020 Enterprises fund operations and equipment purchases. How much of the interest expense can 2020 Enterprises deduct in co this year's taxable income?

Accepted Answer

The answer of 2020 Enterprises, owned by Xio who also...

Question 14

Super Development Company purchased land in the current year from Riverside Chemicals, Inc. The land was contaminated with harmful pollutants, so Super Development paid $1,000,000 to remove the contaminants. What tax issue(s) should be considered before Super files its current year tax return?

Accepted Answer

The answer of Super Development Company purchased land in the...

Question 15

Toni owns a gourmet dog treat shop downtown. She spends $2,800 investigating opening another dog treat shop in Northtown and an additional $3,100 investigating a new location in Southtown. Toni does open the Northtown shop, but does not open the Southtown shop.

Accepted Answer

The answer of Toni owns a gourmet dog treat shop...

Question 16

Toby, owner of a cupcake shop in New York, had been considering opening a similar business (i.e., a cupcake shop) in Phoenix. After spending $6,800 investigating such possibilities in Phoenix, Toby decided against opening the store on July 1. What is the maximum amount of deduction for the current year attributable to these expenditures?

Accepted Answer

The maximum amount of deduction for the current year attributable to these expenditures is $6,800. This is because the expenditures were incurred in investigating the possibility of opening a new business, and are therefore considered to be start-up costs. Start-up costs are deductible up to $5,000 in the year in which the business begins operation, and the remaining balance is amortized over a period of not less than 60 months.

Question 17

During the current year, Charlene borrows $10,000 to purchase Kansas City bonds. Charlene incurs $800 of interest on her outstanding loan. How much interest expense may Charlene deduct in the current year?

Accepted Answer

The answer of During the current year, Charlene borrows $10,000...

Question 18

Doug, a self- employed consultant, has been a firm believer in maintaining a paperless office. Unfortunately, he recently lost all of his business records in a ransomware attack, and his backup system was also compromised. Which of the following cases should Doug investigate to better understand substantiation requirements for business expenses?

Accepted Answer

The Cohan rule allows taxpayers to estimate certain business expenses when they lack complete records, which is relevant to Doug's situation of lost records.

Question 19

Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.

Accepted Answer

Points paid to refinance a mortgage on a principal residence are not fully deductible in the year paid. They must be spread out over the life of the loan. However, there are some exceptions to this rule, such as if the refinance was for home improvements. It is important to consult with a tax professional for specific guidance.

Question 20

American Healthcare (AH), an insurance company, is trying to persuade Congress to enact nationwide anti- smoking legislation. As part of this effort, AH paid $500,000 to hire a lobbying firm to discuss its concerns with members of Congress. AH also contributed $100,000 to candidates for political office who support limiting public smoking. What amount of these expenditures can AH deduct?

Accepted Answer

Lobbying expenses and political contributions are generally not deductible for tax purposes.

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals