Question 1

Federal and state political lobbying expenses are nondeductible.

Accepted Answer

Federal and state political lobbying expenses are considered a form of political contribution and are therefore nondeductible according to IRS regulations.

Question 2

Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

Accepted Answer

According to the IRS, taxpayers who sell merchandise must use the accrual method of accounting for purchases and sales of merchandise. This method requires taxpayers to report income in the year it is earned and expenses in the year they are incurred, regardless of when payments are actually received or made.

Question 3

A taxpayer that operates more than one business may use a different method of accounting for each business.

Accepted Answer

The IRS allows taxpayers to use different methods of accounting for each business they operate.

Question 4

PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.

Accepted Answer

This is true as the IRS requires permission for a change in accounting method for tax purposes.

Question 5

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Accepted Answer

The after-tax cost of a dollar of meal and entertainment expense for a taxpayer with a 40% marginal tax rate would be 60 cents, not 80 cents. This is because the taxpayer can deduct 50% of the expense on their tax return, reducing their taxable income. Therefore, the actual cost to the taxpayer would be 50 cents (100 cents - 50 cents deduction), and the after-tax cost would be 60 cents (100 cents - 40% marginal tax rate).

Question 6

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

Accepted Answer

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is required to receive permission from the IRS to make the change.

Question 7

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2012 and mailed a check to the telephone company on January 4, 2013. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2013.

Accepted Answer

A cash basis taxpayer reports expenses in the year they are paid, not when they are incurred. Since the payment was made in 2013, the deduction is taken in 2013.

Question 8

Marz Services Inc. is a personal service corporation with $60 million average annual gross receipts. Marz must use the accrual method of accounting for tax purposes.

Accepted Answer

The answer of Marz Services Inc. is a personal service...

Question 9

Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.

Accepted Answer

The answer of Taxpayers may adopt the cash receipts and...

Question 10

Taxable income is defined as gross income minus allowable deductions and credits.

Accepted Answer

The answer of Taxable income is defined as gross income...

Question 11

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2012, and received a check in full payment from the client on January 12, 2013. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2012.

Accepted Answer

Since Poole is a cash basis taxpayer, income is only recognized when cash is received. Since the payment was received in January 2013, the $1,675 is taxable income for 2013, not 2012.

Question 12

For federal tax purposes, gross income from the sale of tangible goods is reduced by the seller's cost of goods sold.

Accepted Answer

Gross income from the sale of tangible goods is reduced by the seller's cost of goods sold, which is the cost of acquiring or producing the goods that were sold. This results in a lower taxable income for the seller.

Question 13

A cash basis taxpayer must account for any prepayment of interest expense under the accrual method.

Accepted Answer

A cash basis taxpayer must recognize income and expenses when cash is received and paid, respectively. However, when a prepayment of interest expense is made, the expense must be accounted for under the accrual method and spread over the period to which it applies. This is because the prepayment relates to a future period and is not a current expense.

Question 14

Rydel Inc. was incorporated on August 9 and elected to use a calendar year for tax purposes. Rydel must annualize the income reported on its first tax return for the short period from August 9 to December 31.

Accepted Answer

The answer of Rydel Inc. was incorporated on August 9...

Question 15

Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.

Accepted Answer

Taxpayers that sell merchandise can use either the accrual method or the cash method as their overall method of accounting, depending on certain conditions such as the size of the business and whether they meet the IRS requirements for their specific type of business.

Question 16

Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.

Accepted Answer

The cash basis taxpayer can deduct the cost of the office supplies in the year of payment. Since the payment was made in the current year, it can be fully deducted in the current year.

Question 17

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2012. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2013. Mr. Stern does not recognize the interest as income in 2012.

Accepted Answer

Mr. Stern is a cash basis taxpayer, which means he recognizes income when he receives it, not when it is earned. The notification from the bank does not change the fact that the interest was earned in 2012, and therefore should be recognized as income in that year.

Question 18

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

Accepted Answer

A firm's taxable year is usually chosen based on the annual operating cycle of the business, as it helps to simplify accounting and tax reporting. It is important for a business to choose a taxable year that accurately reflects its income and expenses. Additionally, the type of business entity (such as a corporation, partnership, or sole proprietorship) may also influence the choice of taxable year.

Question 19

Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.

Accepted Answer

As a cash basis taxpayer, Elcox can only deduct the portion of the premium that applies to the current tax year. The rest must be prorated and deducted over the policy's term (36 months).

Question 20

Accurate measurement of taxable income is the only objective of the federal income tax laws.

Accepted Answer

While accurate measurement of taxable income is an important goal of the federal income tax laws, it is not the only objective. The tax laws also have other goals, such as promoting certain social, economic, and political policies, and raising revenue to fund government programs and services.

Quiz 6: Taxable Income From Business Operations