Deck 6: Self-Employed Business Income Line 12 of Form 1040 and Schedule C

Question 1

Under MACRS,the straight-line method is required for all depreciable real property.

Answer 1

True

Question 2

Meals and entertainment expenses are limited to 50%.

Answer 2

True

Question 3

"Listed property" includes only passenger automobiles.

Answer 3

False

Question 4

The standard mileage rate encompasses depreciation or lease payments,maintenance and repairs,gasoline,oil,insurance,and vehicle registration fees.

Question 5

A sole proprietor's trade or business income or loss is reported on Schedule C,Form 1040.

Question 6

The §179 expense deduction is limited to earned income.

Question 7

Transportation costs are deductible when a taxpayer goes to a business meeting away from his or her regular workplace.

Question 8

The significance of meeting the "travel away from home" standard is that it allows the deduction of meals,lodging,and other incidental expenses such as dry cleaning.

Question 9

The cost of all personal property is recovered using a 200% declining-balance rate under MACRS.

Question 10

Taxpayers must use the mid-month convention when more than 40% of the personal property is placed in service during the last three months of the tax year.

Question 11

Fines paid that are ordinary and necessary in a trade or business generally are deductible.

Question 12

Once the more-than-50% business-use test is met for listed property,it does not matter if the business use falls below 50% in subsequent years.

Question 13

A business bad debt is treated as a short-term capital loss and can be deducted only when it becomes completely worthless.

Question 14

The luxury auto limits on depreciation must be reduced if business use is less than 100%.

Question 15

Under MACRS,the half-year convention is used for all real property.

Question 16

The standard mileage rate includes parking fees,tolls,and property taxes on the vehicle.

Question 17

If property is inherited,the property's basis for purposes of depreciation is the same as the decedent's basis.

Question 18

For an expense to be ordinary,it must be customary or usual in the taxpayer's particular business.

Question 19

Depreciation is allowed for every tangible asset (except land)used either in a trade or business or for the production of income.

Question 20

For an expense to be necessary,it must be essential to the taxpayer's business.

Question 21

For a cash-basis taxpayer,any account receivable that is not collected can be written off as a bad debt.

Question 22

Patricia,a professional gambler,had the following income and expenses in her business: $\begin{array}{lr}\text { Gambling winnings}&\$275,000\\\text {Expenses }&\\\text {Fees paid for illegal information }&18,000\\\text {Travel costs }&\$8,000\\\text {Office expenses }&5,000\\\text {Supplies }&3,000\\\text {Business long-distance phone charges }&1,000\\\text {Tickets for illegal parking }&900\\\end{array}$
How much net income must Patricia report from this business?

A)$0.
B)$239,100.
C)$240,000.
D)$258,000.

Question 23

Paola purchased an office building on January 5,2015,for $450,000.$30,000 of the price was for the land.On September 25,2017,he sold the office building.What is the cost recovery deduction for 2017 rounded to the nearest dollar?

A)$0.
B)$7,321.
C)$7,628.
D)$10,769.

Question 24

In June 2017,Kelly purchased new equipment for $26,000 to be used in her business.Assuming Kelly has net income from her business of $75,000 prior to the deduction,what is the maximum amount of cost recovery Kelly can deduct rounded to the nearest dollar,assuming she does not elect §179 expense or bonus depreciation?

A)$3,715.
B)$13,000.
C)$14,858.
D)$26,000.

Question 25

On May 26,2013,Jamal purchased machinery for $30,000 to be used in his business.He did not elect to expense the equipment under §179 or the bonus.On October 10,2017,he sells the machinery to a scrap metal dealer.What is his cost recovery deduction for 2017 rounded to the nearest dollar?

A)$0.
B)$1,340.
C)$2,679.
D)$4,287.

Question 26

Sole proprietors must pay self-employment tax on 100% of their self-employment income.

Question 27

The adjusted basis of an asset is:

A)The cost basis less any accumulated depreciation.
B)The cost of the asset.
C)The fair market value of the asset.
D)The trade-in value of the asset.

Question 28

Trade or business expenses are treated as:

A)Deductible only if the activity had substantial income.
B)An itemized deduction if not reimbursed.
C)Deductible as itemized deductions subject to the 2% AGI floor.
D)Deductible as a for AGI deduction.

Question 29

If inventory is a material amount,what method of accounting is acceptable for a sole proprietorship to use?

A)The cash method.
B)Accrual method.
C)Hybrid method.
D)Both Accrual method and Hybrid method.

Question 30

Which expenses incurred in a trade or business are deductible?

A)Fines and penalties.
B)Supplies expenses.
C)Political lobbying expenses.
D)Bribes.

Question 31

Education expenses are deductible if the education maintains or improves existing skills or if the education helps the taxpayer qualify for a new trade or business.

Question 32

On July 15,2015,Travis purchased some office furniture for $20,000 to be used in his business.He did not elect to expense the equipment under §179 or bonus.On December 15,2017,he sells the equipment.What is his cost recovery deduction for 2017?

A)$0.
B)$1,749.
C)$2,858.
D)$3,498.

Question 33

If an activity is characterized as a hobby,expenses are deductible only to the extent of income from the hobby,subject to certain ordering rules.

Question 34

Which of the following is not a "trade or business" expense?

A)Mortgage interest on a warehouse.
B)Depreciation on business equipment.
C)Mortgage interest on a personal residence.
D)Cost of goods sold.

Question 35

In July 2017,Cassie purchases equipment for $55,000 to be used in her business.Assuming Cassie has a small net loss from her business prior to the deduction,what is the maximum amount of cost recovery Cassie can deduct?

A)$7,860.
B)$27,500.
C)$31,430.
D)$55,000.

Question 36

On November 30,2017,Constance purchased an apartment building for $750,000 (assume this is the Depreciable Cost excluding any Land valuation).Determine her cost recovery deduction for 2017 rounded to the nearest dollar.

A)$0.
B)$2,400.
C)$3,413.
D)$26,138.

Question 37

Della purchased a warehouse on February 25,2017,for $350,000.$45,000 of the price was for the land.What is her cost recovery deduction for 2017 rounded to the nearest dollar?

A)$6,853.
B)$7,865.
C)$9,705.
D)$11,137.

Question 38

If property is converted from personal-use property to business property,the depreciable cost basis is which of the following?

A)Cost of the asset.
B)FMV of the asset.
C)The cost of a new similar asset at the date of conversion.
D)The lower of the cost or FMV at the date of conversion.

Question 39

§179 expense is available for all of the following business assets except:

A)Bulldozer.
B)Phone system.
C)Apartment complex.
D)Office furniture.

Question 40

When business property is lost in a fire,storm,shipwreck,theft,or other casualty,the taxpayer normally receives a capital loss deduction.

Question 41

What form is filed to report the self-employment tax?

A)Form 1040.
B)Schedule SE.
C)Schedule C.
D)Schedule D.

Question 42

If an activity is considered a hobby,which of the following is true?

A)None of the expenses connected with the activity are deductible.
B)None of the income connected with the activity is included in income.
C)The deductible expenses connected with the activity are limited to the income from the activity.
D)The IRS has the burden to prove an activity is a hobby.

Question 43

Cole purchased a car for business and personal use.In 2017,he used the car 60% for business (13,000 total use miles)and used the standard mileage rate to calculate his vehicle expenses.He also paid $1,500 in interest and $360 in county property tax on the car.What is the total business deduction related to business use of the car rounded to the nearest dollar?

A)$1,860.
B)$4,173.
C)$5,289.
D)$6,033.

Question 44

Which of the following is incorrect regarding luxury automobile limitations?

A)Passenger autos with a gross weight of less than 6,000 pounds are subject to the limits.
B)Light trucks or vans that are less than 6,000 pounds are subject to the limits.
C)The limits are reduced further if the business use is less than 100%.
D)The luxury limitations do not apply to the Section 179 expense deduction.

Question 45

During 2017,Regina,a sole proprietor,had the following income and expenses from her home jewelry business.Regina is also employed as an office assistant at a local business:
a.What income or loss should be reported on Schedule C?
b.What is Regina's AGI?

Question 46

Which of the following individuals can deduct his or her education expenses?

A)An accountant who attends law school to get a law degree.
B)A medical doctor who attends a review course to obtain a financial consultant license.
C)A lawyer who goes to law school to get a specialized tax degree.
D)An accounting bookkeeper that takes a CPA review course to pass the CPA exam and become a CPA.

Question 47

Bart has the following income and expenses for his Schedule C:
What is Bart's self-employment income?

Question 48

Shante is employed by a local pharmaceutical company where she earned $48,000 in 2017.During the year,she also had self-employment income of $18,000.Her self-employment tax rounded to the nearest dollar is:

A)$0.
B)$2,061.
C)$2,543.
D)$2,754.

Question 49

Under MACRS,5-year property includes:

A)Warehouse.
B)Apartment complex.
C)Automobiles and light trucks used in a trade or business.
D)Fruit-bearing trees.

Question 50

In order for an employee to deduct home office expenses,which of the following must occur:

A)The business use of the home must be specifically for trade or business purposes.
B)There must be no other fixed business location.
C)The taxpayer's most important activities must occur in the home.
D)The home office must be for the convenience of his or her employer.

Question 51

Marion drives 20 miles a day from his first job to his second job.He worked 125 days during 2017 on both jobs.What is Marion's mileage deduction rounded to the nearest dollar assuming he uses the standard mileage rate and mileage is incurred ratably throughout the year?

A)$77.
B)$1,338.
C)$1,400.
D)$3,905.

Question 52

Deductible education expenses include all of the following except:

A)Tuition.
B)Books.
C)Travel.
D)Room and board.

Question 53

Marcus has two jobs.He works as a night auditor at the Midnight Motel.When his shift at the motel is over,he works as a short order cook at the Break-An-Egg Restaurant.On a typical day,he drives the following distances: $\begin{array}{lr}\text {Home to Midnight Motel }&4 \text { miles }\\\text {Midnight Motel to restaurant }&12 \text { miles }\\\text {Restaurant to home }&8\text { miles }\\\end{array}$
How many miles per day would qualify as transportation expenses for tax purposes?

A)0)
B)4)
C)12.
D)24.

Question 54

Which of the following statements is false with respect to the standard mileage rate?

A)The standard mileage rate encompasses depreciation.
B)The taxpayer can have an unlimited number of autos and use the mileage rate.
C)Section 179 cannot be used on a standard mileage rate auto.
D)The standard mileage rate cannot be used on a taxi.

Question 55

Byron took a business trip from Philadelphia to Rome.He was away 16 days of which he spent 9 days on business (including two travel days)and 7 days vacationing.His expenses are as follows: $\begin{array}{lr}\text { Airfare } & \$ 1,100 \\\text { Lodging }(16 \text { days } \times \$ 140) & 2,240 \\\text { Meals }(16 \text { days } \times \$ 115) & 1,840\end{array}$ Byron's total travel (including meals and lodging)expense deduction rounded to the nearest dollar is:

A)$2,396.
B)$2,878.
C)$3,395.
D)$5,180.

Question 56

For 2017,what is the social security tax rate and income limit for a self-employed individual? $\quad$ Rate $\quad$$\quad$$\quad$ Income Limit
a. $2.9 \%$$\quad$$\quad$$\quad$ Unlimited income
b. $12.4 \%$ $\quad$$\quad$ Unlimited income
c. $15.3 \%$$\quad$$\quad$$\quad$$\$ 127,200$
d. $12.4 \% \quad\quad\quad \$ 127,200$

A)Option A
B)Option B
C)Option C
D)Option D

Question 57

Katherine earned $100,000 from her job at a local business in 2017.She also had $42,000 in self-employed consulting income.What is the amount of her self-employment tax rounded to the nearest dollar?

A)$0.
B)$4,498.
C)$5,935.
D)$6,426.

Question 58

Chris runs a business out of her home.She uses 500 square feet of her home exclusively for the business.Her home is 2500 square feet in total.Chris had $36,000 of business revenue and $32,000 of business expenses from her home business.The following expenses relate to her home: $\begin{array}{lr}\text { Mortgage interest } & \$ 12,400 \\\text { Real estate taxes } & 1,800 \\\text { Repairs } & 3,200 \\\text { Utilities } & 2,600 \\\text { Insurance } & 650 \\\text { Depreciation (on business use portion of home) } & 1,750\end{array}$ What is Chris' net income from her business and the amount of expenses carried over to the following year,if any?
Net income $\quad$$\quad$ Carryover
a. $0 $\quad$$\quad$$\quad$$\quad$ $1,880
b. $0 $\quad$$\quad$$\quad$$\quad$ $0
c. $4,000 $\quad$$\quad$$\quad$ $4,130
d. $36,000 $\quad$$\quad$$\quad$ $0

A)Option A
B)Option B
C)Option C
D)Option D

Question 59

Which of the following properties is not eligible for the §179 expense election when purchased?

A)A business automobile.
B)A business computer.
C)Rental property.
D)Manufacturing equipment.

Question 60

The standard mileage rate encompasses all of the following auto costs except for:

A)Depreciation or lease payments.
B)Auto property taxes.
C)Maintenance and repairs.
D)Gasoline,oil,and insurance.

Question 61

Oscar bought an $800,000 apartment building on July 28,2017.On August 15,2017,he purchased $300,000 of 5-year class assets.Oscar elects to take the maximum expense on every asset.What is the maximum cost recovery deduction Oscar can take in 2017?

Question 62

On April 23,2017,Bailey purchased an automobile for $25,000.The car is used 80% for business and 20% for personal use.What is the cost recovery deduction for 2017 and 2018 assuming the 50% bonus was taken? (Round answers to the nearest dollar)

Question 63

Nancy purchased a computer on July 15,2017,for $5,000.The computer was used 70% of the time in her business and the rest of the time her children used the computer to surf the Web.In 2017,the computer was used 40% for business and 60% for personal use.What are the cost recovery deductions for 2017 and 2018? (No §179 or bonus).Is there any recapture of depreciation in 2017?

Question 64

List and define the criteria for an expenditure to be deductible on Schedule C.

Question 65

Terry,a CPA,flew from Dallas to New York to attend a conference.The conference lasted four days.Then she took three days of vacation to go sightseeing.Terry's expenses for the trip are as follows:
Calculate Terry's travel expense deduction.

Question 66

Sandy is the owner of ABC Loan Company.On June 2,2016,ABC loaned Randy $80,000.In 2017,Randy filed for bankruptcy.At that time,the bankruptcy court indicated that Randy's creditors could expect to receive 30 cents on the dollar.In August 2018 final settlement was made,and ABC received $20,000.ABC's policy is to deduct losses as soon as permitted.How much loss can ABC deduct and in which year?

Question 67

Xavier bought furniture and fixtures (7-year property)on September 15,2017 for $515,000.He elects to expense as much as possible under Section 179 but does not elect the 50% bonus.Xavier's earned income for the year is $510,000.What is the maximum deduction Xavier can take in 2017 for the equipment? (Round answers to the nearest dollar)

Question 68

Kiri acquires equipment (7-year property)on August 14,2017,for $80,000.She does not elect to expense the asset under Section 179 or the 50% bonus.She sells the asset on January 15,2021.
a.What is Kiri's cost recovery deduction related to the equipment in 2017 and 2021?
b.What is Kiri's cost recovery deduction related to the equipment in 2017 and 2021 if the 50% bonus is elected?

Question 69

Lateefah purchased a new office building on April 1,2017,for $3,000,000.On August 20,2021,the building was sold.What is the cost recovery deduction for the year of purchase and the year of sale?

Question 70

Alice is a high school teacher who enjoys knitting.She knits scarves and sweaters and sells them in a local boutique.Alice spends 10 to 15 hours a week knitting the scarves and sweaters.Alice had sales of $6,000 and expenses of $10,000 related to knitting and selling the goods.Alice's $10,000 of expenses consisted of $800 of interest expense and $1,600 in property taxes for her building and tools,$3,000 in supplies,and $4,600 in depreciation charges.How would Alice's income and expenses be reported on her tax return if her knitting activity is characterized as a hobby?

Question 71

Describe each of the depreciation conventions and when each is applicable.

Question 72

Tonia acquires the following 5-year class property in 2017:
Tonia does not elect §179 or bonus depreciation.Tonia has $300,000 of taxable income from her business.Determine her total cost recovery deduction for the year.

Question 73

Alan owns a ranch in Kansas.During the year,a tornado damaged one of his barns and destroyed some equipment.The following information provides the details of the losses Alan suffered from the tornado.
How much loss from the tornado can he deduct on his tax return for the current year?

Question 74

Bob took a business trip from Chicago to London.He was away 12 days of which he spent six days on business (including two travel days)and six days vacationing.His expenses are as follows:
Calculate Bob's travel expense deduction.

Question 75

Beau earned $35,000 of net earnings from a tax preparation business that he runs during tax season.He also earned a salary of $100,000 from his full-time job.How much self-employment tax must he pay for 2017? (Round calculations to the nearest dollar)

Question 76

Ted purchased a vehicle for business and personal use.In 2017,Ted used the vehicle 70% for business (10,000 business miles)and used the standard mileage rate to calculate his vehicle expenses.Ted also paid $1,200 in interest and $380 in county property tax on the car.What is the total business deduction related to business use of the car in 2017?