Question 1

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

Accepted Answer

The cost of the automobile is considered a capital expenditure and therefore cannot be deducted in the current year. Instead, Kelly will deduct the cost through depreciation over the useful life of the vehicle.

Question 2

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?

Accepted Answer

Henry can deduct $5,117 in the current year. The $12,000 of expenses investigating the golf store are considered startup costs, which cannot be fully expensed in the current year. However, Henry can elect to deduct up to $5,000 of startup costs in the current year (with a phaseout threshold of $50,000), and amortize the remaining expenses over 180 months. The deductible amount is reduced by the amount by which the startup costs exceed $50,000, so in this case, the deductible amount is $5,000 - (($12,000 - $50,000)/$10,000)) = $5,117.

Question 3

Which of the following is not deductible?

Accepted Answer

Interest income from municipal bonds is generally exempt from federal income taxes, and therefore, expenses related to earning this income are not deductible.

Question 4

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.
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Accepted Answer

Currently, neither of the payments described are deductible. The first payment would have been deductible prior to the Tax Cuts and Jobs Act of 2017, but is no longer deductible. The second payment is considered a miscellaneous itemized deduction, which were eliminated under the same tax reform.

Question 5

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.
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Accepted Answer

Both statements are correct because the IRS does not allow deductions for personal expenses, including legal costs related to acquiring a personal residence or losses from the sale of personal residences.

Question 6

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

Accepted Answer

Rent paid on an office to run an illegal gambling operation can be deducted as a trade or business expense. However, the other options involve illegal or unethical activities and cannot be deducted.

Question 7

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.
I.If negotiations are successful and Davis incurs $40,000 in start-up costs to open his new 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.
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Accepted Answer

Statement I is correct regarding the deduction of start-up costs. According to the IRS, expenses related to investigating a business opportunity, intended to help decide whether to start or acquire a business, are not deductible if the decision is not to go ahead. Therefore, statement II is incorrect.

Question 8

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?

Accepted Answer

Kim can deduct $5,000 of the investigation expenses immediately. The remaining $5,400 is amortized over 180 months, resulting in an additional deduction of $180 for the current year, totaling $5,180.

Question 9

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.
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Accepted Answer

Angel has a business purpose for the payments as they are necessary to get his head chef back to work. If Carmen repays the expenditures, it would be considered a loan and not deductible. If Angel does not require repayment, the payments are considered compensation, which is deductible.

Question 10

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.
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Accepted Answer

Currently, only statement I is correct as employer-paid education expenses are deductible as long as they are job-related and meet certain criteria outlined in the tax code. However, statement II does not meet this criteria as Karl's son is not an employee and the tuition is not job-related.

Question 11

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.
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Accepted Answer

The expenses incurred by Jackie while investigating sites for her boat shop and checking out boat franchises are start-up costs. If Jackie decides not to enter the business, the start-up costs are not deductible. Therefore, statement II is correct. If Jackie enters the boat business, she can elect to deduct up to $5,000 of start-up costs in the first year of business, and the remainder must be capitalized and amortized over 180 months. Statement I is incorrect because the $3,800 start-up costs cannot be deducted by capitalizing them and amortizing them over 180 months unless Jackie enters the boat business.

Question 12

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.
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Accepted Answer

Membership dues to an environmental lobbying group are generally not deductible as they are considered lobbying expenses. The cost of acquiring a new business automobile is capitalized and depreciated over time rather than being immediately deductible as an expense.

Question 13

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

Accepted Answer

For a business or investment expense to be deductible, it does not have to be recurring. The key requirements include being ordinary and necessary, reasonable in amount, and the taxpayer's own expense.

Question 14

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.
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Accepted Answer

Premiums paid on liability insurance for the taxpayer are personal in nature and therefore not deductible.

Question 15

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.
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Accepted Answer

Personal property taxes on a hot air balloon operated as a hobby are not currently deductible as a trade or business expense. However, interest paid on a mortgage note on a business warehouse is currently deductible as a trade or business expense.

Question 16

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?

Accepted Answer

Wanda can deduct the full $13,600 of investigation expenses in the current year. The IRS allows taxpayers to deduct expenses related to investigating the creation or acquisition of an active trade or business. Since Wanda decided not to proceed with the second restaurant, these expenses are considered nondeductible startup costs and can be fully deducted in the year the decision is made not to proceed with the new business.

Question 17

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?

Accepted Answer

Paul can deduct $5,567 of the investigation expenses in the current year.

According to IRS rules, investigation expenses incurred before deciding to enter into a new business or before identifying a specific business location must be treated as capital expenses and cannot be deducted in the current year.

Since Paul incurred $51,000 of investigation expenses before identifying the specific location for the golf course, he cannot deduct those expenses in the current year.

However, the $51,000 of investigation expenses can be amortized over a period of 180 months once the new business is operational. This means that Paul can deduct $284.83 ($51,000/180) of the investigation expenses each month.

Since Paul opened the golf course on July 1st (the 7th month of the year), he can deduct 7 x $284.83 = $1,993.81 of the investigation expenses in the current year.

Therefore, the correct answer is C) $5,567 - $1,993.81 = $3,573.19.

Question 18

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

Accepted Answer

C) $15,000 fee paid to a TV station to advertise a new product is a currently deductible trade or business expense because it is a direct cost associated with promoting the business's products, which is considered an ordinary and necessary business expense.

Question 19

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

Accepted Answer

The payment of $25 per hour to Portia's brother Sidney may not be considered reasonable because it exceeds the amount paid to the other interns for the same work. The expense must be reasonable in relation to other comparable payments for the same services in order to be deductible.

Question 20

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?

Accepted Answer

Diana's capital gain is calculated by subtracting the cost basis of the shares sold from the total sale proceeds. She sold 1,000 shares at $17 each, totaling $17,000. The cost basis for these shares is $10,000 (1,000 shares at $10 each) plus a proportional share of the initial commission ($300 * 1,000/1,500 = $200), totaling $10,200. The sale commission is $175. Therefore, the capital gain is $17,000 - $10,200 - $175 = $6,625.

Quiz 5: Introduction to Business Expenses

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

Which of the following is not deductible?

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. ​

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

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. ​

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. ​

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

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. ​

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. ​

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

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.

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.

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.

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.

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.