Question 1

Ellen loans Nicole $45,000 to start a hair salon.Unfortunately,the business fails in 2013 and she is unable to pay back Ellen.In 2013,Ellen also had $20,000 of income from her part-time job and $12,000 of capital gain from the sale of stock.How much of the $45,000 bad debt can Ellen claim as a capital loss in 2013?

Accepted Answer

The answer of Ellen loans Nicole $45,000 to start a...

Question 2

Richard operates a hair styling boutique out of his home.The boutique occupies 300 of the home's 1,200 square feet of floor space.Other information is as follows: $\begin{array}{lr}
\text { Gross income from the boutique } & \$ 10,000 \
\text { Supplies for the boutique } & \$ 2,000 \
\text { Depreciation on total residence } & \$ 12,000 \
\text { Utilities for total residence } & \$ 6,000
\end{array}$ What amount of income or loss from the boutique should Richard show on his return?

Accepted Answer

Richard can deduct a portion of the home's expenses proportional to the space used for business. The boutique occupies 25% of the home (300/1200 square feet). Therefore, he can deduct 25% of the depreciation and utilities. Deductible expenses: Supplies: $2,000, Depreciation: $3,000 (25% of $12,000), Utilities: $1,500 (25% of $6,000). Total deductible expenses: $6,500. Income from boutique: $10,000. Income after expenses: $10,000 - $6,500 = $3,500.

Question 3

Peter is a self-employed attorney.He gives the following information about his business to his CPA for use in preparing his 2013 tax return: Income
Fees from law practice $\quad \$ 153,000$
Expenses
$\begin{array}{ll}\text { Malpractice insurance }&\$800\
\text { Office rent } & 12,000 \
\text { Office supplies } & 5,500 \
\text { Travel expense } & 2,000 \
\text { Meals and entertainment } & 6,500 \
\text { Paralegal wages } & 25,500 \
\text { Country club dues (Peter uses the club for business entertainment) } & 2,500
\end{array}$ Peter also drove his car 5,034 miles for business and used the standard mileage method for computing transportation costs.How much will Peter show on his Schedule C for 2013 for: 
a.Income
b.Tax deductible expenses
c.Taxable income

Accepted Answer

The answer of Peter is a self-employed attorney.He gives the...

Question 4

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 the year? Where in her tax return should Christine claim this deduction?

Accepted Answer

The answer of Christine is a self-employed tax accountant who...

Question 5

Which of the following is not a factor that the IRS looks at to determine if a loss is from a hobby or from a business?

Accepted Answer

The answer of Which of the following is not a...

Question 6

Gene is a self-employed taxpayer working from his home.His net income is $7,000 before home office expenses.His allocable home office expenses are $8,000 in total.How are the home office expenses treated on his current year tax return?

Accepted Answer

According to the IRS, home office expenses can only be deducted up to the amount of income earned from the home-based business. In this case, Gene earned $7,000 from his self-employment, so only $7,000 of his home office expenses can be deducted on his current year tax return. However, the remaining $1,000 that was not deducted can be carried forward to future tax years. Therefore, choice D is the correct answer.

Question 7

Martin has a home office for his business as an agent for rock-and-roll bands.The business shows a loss of $2,000 before home office expenses.How should the home office expenses be treated?

Accepted Answer

Home office expenses, other than mortgage interest and property taxes allocated to the office, cannot be deducted in the current year due to the business loss but can be carried forward to the next year. This allows taxpayers to potentially deduct these expenses in a future year when the business is profitable.

Question 8

Karen has a net operating loss in 2013.If she does not make any special elections,what is the first year to which Karen can carry the net operating loss?

Accepted Answer

The answer of Karen has a net operating loss in...

Question 9

In determining whether an activity should be classified as a hobby,the tax law provides a rebuttable presumption with regard to the profits or losses of an activity.Which of the following statements describes the profit/loss test which must be satisfied in order to meet the presumption that the activity is not a hobby?

Accepted Answer

The profit/loss test requires the activity to show a profit in at least three of the last five tax years. This applies to most taxpayers, but certain circumstances may require the test to be met in seven out of the last 10 years.

Question 10

Kendra is a self-employed taxpayer working exclusively from her home office.Before the home office deduction,Kendra has $5,000 of net income.Her allocable home expenses are $10,000 in total.How are the home office expenses treated on her current year tax return?

Accepted Answer

The IRS allows home office expenses to be deducted only up to the amount of net income from the business. Any excess expenses can be carried forward to future years.

Question 11

Bobby is an accountant who uses a portion of his home as his office.His home is 2,500 square feet and his office space occupies 1,000 square feet.Rent expense is $20,000 a year;utilities expense is $1,200 a year;and maintenance expense is $2,000 a year.What is the total amount of these expenses that can be allocated to his home office?

Accepted Answer

The answer of Bobby is an accountant who uses a...

Question 12

The net operating loss NOL)provisions of the Internal Revenue Code

Accepted Answer

The net operating loss provisions of the Internal Revenue Code are primarily designed to provide relief for trade or business losses, allowing taxpayers to carry forward losses to offset future income from the same trade or business.

Question 13

Which of the following would be a business bad debt if it were uncollectible?

Accepted Answer

A business bad debt can only be claimed as a deduction if it is related to the taxpayer's trade or business. Choices A, B, and D are all personal loans made by the taxpayer, and are not related to their trade or business. Choice C involves a dentist extending credit to a patient for services provided, which is related to their trade or business and could potentially become a business bad debt if it were uncollectible.

Question 14

Which of the following factors are considered by the IRS in evaluating whether an activity is classified as a business or a hobby?

Accepted Answer

All of the above factors are considered by the IRS in determining whether an activity is a business or a hobby. The taxpayer's expertise, time and effort expended, financial status, and income and loss history from the activity are all relevant to the determination. This is because the IRS needs to determine the taxpayer's intent for engaging in the activity and whether it is primarily for profit or personal pleasure.

Question 15

In his spare time,Fred likes to restore old furniture and sell it to his friends.He is a lawyer by trade.During 2013,he sells $500 worth of furniture and has $21,000 worth of expenses.Which one of the following is true?

Accepted Answer

Since Fred is engaged in a hobby rather than a trade or business, his deductions are limited to the income from selling furniture. Therefore, he can only deduct $500 (the amount of income he earned) in expenses.

Question 16

Tim loaned a friend $4,000 to buy a used car.In the current year,Tim's friend declares bankruptcy and the debt is considered totally worthless.What amount may Tim deduct on his individual income tax return for the current year as a result of the worthless debt,assuming he has no other capital gains or losses for the year?

Accepted Answer

When a personal loan to a friend becomes totally worthless, it is treated as a nonbusiness bad debt for tax purposes. Nonbusiness bad debts are reported as short-term capital losses regardless of how long the loan was outstanding. The maximum amount of capital losses that can be deducted against ordinary income in any one year is $3,000 ($1,500 if married filing separately). Therefore, Tim may deduct $3,000 as a short-term capital loss on his individual income tax return for the current year.

Question 17

Splashy Fish Store allows qualified customers to purchase items on credit.During 2013,Lisa,the owner of the store,determines that $3,500 of accounts receivable are not collectible.Which of the following statements is true with respect to Lisa's deduction for the uncollectible accounts receivable?

Accepted Answer

The answer of Splashy Fish Store allows qualified customers to...

Question 18

During the 2013 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: 8 at $10 each 8 at $25 each 8 at $50 each
10 at $100 each
For 2013,what is the amount of Bob's business gift deduction?

Accepted Answer

The IRS allows a deduction of up to $25 per business gift per recipient. Bob gave gifts to 34 customers, but the deduction is limited to $25 per customer. Therefore, the deduction is 34 customers x $25 = $850. However, the correct choice is C, $730, because the total value of gifts given is $730, which is the maximum deductible amount under the $25 per recipient rule.

Question 19

Peter operates a dental office in his home.The office occupies 250 square feet of his residence,which is a total of 1,500 square feet.During 2013,Peter pays rent for his home of $12,000,utilities of $4,800,and maintenance expenses of $1,200.What amount of the total expenses should be allocated to the home office?

Accepted Answer

The home office occupies 250/1500 = 1/6 of the total residence. Therefore, 1/6 of the total expenses ($12,000 + $4,800 + $1,200 = $18,000) should be allocated to the home office. 1/6 of $18,000 is $3,000.

Question 20

Patrick has a business net operating loss of $70,000 in 2013.Patrick's business did well in 2011 and in 2012.Which of the following is true?

Accepted Answer

According to IRS rules, a net operating loss can be carried back for up to two years and carried forward for up to 20 years to offset future taxable income. Therefore, option A is correct as Patrick can carry the net operating loss back to 2011 and 2012 to offset the income generated in those years and carry forward the remaining amount to offset future taxable income. Option B is incorrect as the IRS rules do not allow for selecting any year to offset income. Option C is incorrect as net operating losses can be carried back and forward to offset past and future taxable income. Option D is incorrect as Patrick cannot offset 2012's income with 2013's net operating loss without carrying it back to 2012 first.

Quiz 3: Business Income and Expenses, Part I