Deck 3: Business Income and Expenses

Question 1

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.
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Answer 1

False

Question 2

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 intermittent effort toward the activity
C)Regular and continual effort designed to seek profit
D)Organization as a corporation or partnership

Answer 2

C

Question 3

Acacia Company had inventory of $300,000 on December 31, 20X1. Other information is as follows: $$\begin{array} { | l | r | } \hline \text { Purchases } & \$ 1,500,000 \\\hline \text { Sales } & 1,800,000 \\\hline \text { Inventory 1/1/20X1 } & 500,000 \\\hline\end{array}$$ What is the amount of Acacia's cost of goods sold for 20X1?

A)$2,000,000
B)$1,600,000
C)$1,700,000
D)$1,800,000
E)None of these

Answer 3

$1,700,000

Question 4

Stone Pine Corporation, a calendar year taxpayer, has ending inventory of $150,000 on December 31, 20X2. During the year 20X2, the corporation purchased additional inventory of $375,000. If cost of goods sold for 20X2 is $470,000, what was the beginning inventory at January 1, 20X2?

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

Question 5

In 2019, to report the net profit or loss from a partnership with business expenses of $2,500 or less, a taxpayer can use Schedule C-EZ.

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

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 D
E)Schedule B

Question 8

Patricia is a business owner who is trying to determine her cost of goods sold for the current year. 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 during the current year and uses FIFO for her inventory valuation. What was her cost of goods sold in the current year, assuming that there was no inventory at the beginning of the year?

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

Question 9

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

Question 10

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 these

Question 11

What is the purpose of Schedule C?

Question 12

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 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

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 these

Question 15

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 16

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 these

Question 17

Peter is a self-employed attorney. He gives the following information about his business to his CPA for use in preparing his 2019 tax return: Peter also drove his car 5,850 miles for business and used the standard mileage method for computing transportation costs. How much will Peter show on his Schedule C for 2019 for:
a.Income
b.Tax deductible expenses
c.Taxable income

Question 18

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. ​
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Question 19

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 20

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 these

Question 21

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 22

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 2019? Where in her tax return should Christine claim this deduction?

Question 23

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 24

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 these

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

Barry is a self-employed attorney who travels to New York on a business trip during the year. Barry's expenses were as follows: $$\begin{array} { l r } \text { Airfare } & \$ 560 \\\text { Taxis } & 40 \\\text { Meals } & 100 \\\text { Lodging } & 350\end{array}$$ How much may Barry deduct as travel expenses for the trip?

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

Question 27

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 28

Chris opens a chiropractic office in Houston on January 1, 2019. In 2019, 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 2019. He elects to use the standard mileage method. On January 1, 2019, 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 2019 tax year.

Question 29

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 30

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

Question 31

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 2015. How much is Curt's deductible auto expense for the year?

Question 32

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 Tesla for calling on clients.
E)All of the above taxpayers may use the standard mileage method.

Question 33

During the current year, Harry, a self-employed accountant, travels from Kansas City to Miami for a seven-day 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 these

Question 34

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

Question 35

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 36

The standard mileage rate for automobiles in 2019 is 56 cents per mile.

Question 37

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 38

If the taxpayer does not maintain adequate records of car expenses (i.e., gas, tires, car insurance, etc.), the standard mileage rate cannot be used.
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Question 39

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 2019?

Question 40

Greg, a self-employed plumber, commutes from his home to his office which is 10 miles away. At his office, 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 41

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 42

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 2019, his expenses for maintaining and operating 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 2019?

Question 43

Dennis, the owner of Dennis Company, incurs the following expenses while away from home on a 3-week business trip during 2019: 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 2019 as travel expenses for the trip.
Calculate the amount Dennis may deduct for 2019 as entertainment.
Calculate the amount Dennis may deduct for 2019 as business gifts.

Question 44

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

A)$300
B)$600
C)$750
D)$1,500
E)None of these

Question 45

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 46

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

Question 47

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 48

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 49

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 these must be substantiated

Question 50

Mary is an insurance salesperson and a member of the Country Club. During the current year, Mary used the club 40 percent for entertaining clients and 60 percent for pleasure. She incurred the following expenses at the Country Club: Calculate the amount that Mary is allowed to deduct.

Question 51

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

Question 52

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 53

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 meals and entertainment expense Girard may claim in the current year? On which tax form should he claim the deduction?

Question 54

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

Question 55

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 contractor jobs.
B)Henry, a self-employed 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 56

Wanda is a single taxpayer and an elementary school teacher. She also tutors students in her home as a small business. During 2019, Wanda purchased $300 in school supplies for her classroom. She also purchased $400 in supplies and materials for her tutoring business. Lastly, she uses a 200 square feet 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, what are her deductions that she may claim on her tax return based on the information provided (ignore any income limitations) and where can she claim these deductions?

Question 57

Jack is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in business meals, and $2,000 in green fees to entertain clients. He has separate invoices for the meals. 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)$3,200
C)$7,200
D)$14,400
E)None of these

Question 58

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 59

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 these

Question 60

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 deduction for attending this event.

Question 61

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 62

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 63

Sally is a high school math teacher. In 2019, 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 2019 for AGI educator's expenses deduction?

A)$0
B)$250
C)$350
D)$500
E)None of these

Question 64

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 these

Question 65

Acme Corporation had the following expenses:

Acme has a qualified plan for the job awards. Calculate Acme’s total deductions for the above expenses.

Question 66

Sue is a small business owner who often gives gifts to clients. She gives a $40 gift to her client, Mr. Smith, and his wife. Sue spent $6 to wrap the gift. She also gave out 400 calendars with her company name on them. Each calendar cost $1. Sue also gave her secretary a $370 watch for his 10 years of service. How much of the above expenses may she deduct?

A)$816
B)$446
C)$795
D)$801
E)None of these

Question 67

Which of the following does not give rise to a business expense for self-employed taxpayer's uniforms or special clothing?

A)A lawyer buys a business suit.
B)A mascot buys his costume.
C)A clown buys his costume.
D)A scientist buys his hazmat suit.
E)All of these are deductible.

Question 68

Nancy owns a small dress store. During the year, Nancy gives business gifts having the indicated cost to the following individuals: $$\begin{array} { l l } \text { Mrs. Johns (a customer) } & \$ 37 \text { plus } \$ 3 \text { shipping } \\\text { Mr. Johns (nonclient husband of Mrs. Johns) } & \$ 10 \\\text { Ms. B rown (a customer) } & \$ 22\end{array}$$ What is the amount of Nancy's deduction for business gifts?

A)$0
B)$50
C)$53
D)$62
E)None of these

Question 69

During the current year holiday season, Bob, a barber, gave business gifts to 34 customers. The values of the gifts, which were not of a promotional nature, were as follows:
10 at $10 each
8 at $25 each
8 at $50 each
8 at $100 each
For the current year, what is the amount of Bob's business gift deduction?

A)$0
B)$700
C)$850
D)$1,500
E)None of these

Question 70

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 71

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

Question 72

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

Question 73

Marco makes the following business gifts during the year: Marco also spent $15 on wrapping paper and a card for the above gift to the Whites.
Calculate Marco's total allowed deduction for gifts

Question 74

Teachers at the kindergarten through high school level may deduct a maximum of $225 of education supplies and materials cost each year ($450 if married filing jointly and both spouses are educators).

Question 75

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

Question 76

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

Question 77

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

Question 78

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 79

Natasha is a self-employed private language tutor. In 2019, 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 80

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