Question 1

An expense that is incurred for the production of rent will be deducted for adjusted gross income.

Accepted Answer

Expenses incurred for the production of rental income, such as repairs, maintenance, and property management fees, are deductible for adjusted gross income on a rental property.

Question 2

Morgan, a banker, is an amateur photographer who takes pictures at weddings and parties. He earned $1,000 but incurred $1,200 in related expenses. Since he takes a standard deduction, he will have to include the $1,000 in income but will not get any benefit from the expenses.

Accepted Answer

Since Morgan takes a standard deduction, he cannot deduct his expenses and will have to include the full $1,000 in his income.

Question 3

Bowen is planning to quit his job as a plumber and open a paint store. He has incurred expenses of $8,000 dealing with the opening of the store and will be able to deduct all of these expenses.

Accepted Answer

According to the IRS, expenses related to starting a business, such as legal fees and advertising costs, can be deducted in the first year of operation as long as they were incurred before the business officially opened. Therefore, Bowen can deduct the $8,000 expenses he incurred for the opening of the paint store.

Question 4

To be deductible, the dominant motive for incurring an expense must be
A) the relationship to a business activity.
B) to reduce income taxes.
C) tax avoidance.
D) the intent to earn a profit.
E) personal.

Accepted Answer

The dominant motive for incurring an expense must be to earn a profit in order for it to be deductible. Choices A and E are relevant factors, but alone they do not make an expense deductible. Choices B and C are not valid motives for incurring an expense and may lead to disallowance of the deduction.

Question 5

Andy lives in New York and rents his house for two weeks during the U.S. Open Tennis tournament for $3,500. He must include the rent in his income.

Accepted Answer

According to the IRS, if you rent out your property for 14 days or fewer in a year, you do not have to report the rental income.

Question 6

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

Accepted Answer

A necessary expense is one that is considered ordinary and necessary for the taxpayer's particular trade, business, or profession. These expenses are generally deductible if they are reasonable and directly related to the income activity.

Question 7

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

Accepted Answer

The answer of Evelyn can avoid the 2 percent limitation...

Question 8

Ona is a professional musician. She prepared her music teacher's tax return in exchange for music lessons. Since she is a cash basis taxpayer, she cannot take a deduction for the music lessons.

Accepted Answer

As a cash basis taxpayer, Ona can still deduct the fair market value of her services provided in exchange for the music lessons, as this barter transaction is considered taxable income and the expense (music lessons) can be deductible if it qualifies as a business expense.

Question 9

John decides rather than work late in the office, he does all of his work in an office at home. His employer approves of this arrangement. Since John uses his home office on a regular and exclusive basis, he will be eligible to take a home office deduction even though it was not required as a condition of employment.

Accepted Answer

The Tax Cuts and Jobs Act of 2017 suspended the home office deduction for employees from 2018 through 2025. Only self-employed individuals can claim this deduction during this period.

Question 10

Teresa, Terri, and Tricia operate Sassy Solutions, an exclusive boutique. Based on advice from Teresa's sister, a CPA, the three form a partnership. Teresa owns 50% and Terri and Tricia each own 25%. For the year, Sassy Solutions reports the following:  For tax purposes, what amount will Sassy Solutions report to Teresa as her ordinary income from the partnership?
A) $144,000
B) $146,000
C) $148,000
D) $138,000
E) $140,000

Accepted Answer

The answer of Teresa, Terri, and Tricia operate Sassy Solutions,...

Question 11

An individual is indifferent whether an expense is deducted for or deducted from adjusted gross income.

Accepted Answer

Deductions for adjusted gross income (AGI) can reduce taxable income more effectively than deductions from AGI, which are subject to limitations and thresholds.

Question 12

For a taxpayer to be engaged in a trade or business, the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

Accepted Answer

While producing a profit is a significant factor in determining whether an activity is a trade or business, it is not the only factor. The IRS considers various other factors, such as the time and effort spent on the activity, the expertise of the taxpayer, and the expectation of generating future profits. Additionally, an activity does not necessarily have to be the taxpayer's sole livelihood to be considered a trade or business.

Question 13

A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

Accepted Answer

The answer of A taxpayer can take a deduction for...

Question 14

In order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

Accepted Answer

According to the IRS, in order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

Question 15

In order for a taxpayer to reduce taxable income with a deduction, the tax law must allow it, and it must meet all statutory requirements.

Accepted Answer

This is correct, in order for a taxpayer to reduce taxable income with a deduction, the deduction must be allowed by the tax law and meet all statutory requirements.

Question 16

Devery, Inc. sells high tech machine parts that are fully warranted against defects. Based on prior years experience they can expect to incur $20,000 of warranty expense on current sales. They are on the accrual basis, and the warranty expense is based on a reasonable estimate, so Devery can deduct the $20,000.

Accepted Answer

Under the accrual basis of accounting, a business can only deduct warranty expenses in the year they are actually incurred, not when they are estimated or expected to occur.

Question 17

Tom, Dick, and Harry operate Quality Stores. Based on advice from Tom's sister, a CPA, the three form a partnership. Tom owns 50%; Dick and Harry each own 25%. For the year, Quality Stores reports the following:  By how much will Tom's adjusted gross income increase because of the above?
A) $178,000
B) $180,000
C) $183,000
D) $184,000
E) $186,000

Accepted Answer

The answer of Tom, Dick, and Harry operate Quality Stores....

Question 18

Pamela owns the building where her plumbing supply business is located. This year she put on vinyl siding to replace the weathered wood siding on her building. The cost of the new siding can be expensed in the current year.

Accepted Answer

The cost of improvements to a building, such as replacing siding, must be capitalized and depreciated over a period of years. It cannot be expensed in the current year.

Question 19

Which of the following is an example of a business purpose as dominant motive? Darren is a full-time plumber and a part-time Amway salesman. He is taking his family to I. II. Disney World and plans to take his Amway products with him so that he may deduct most of his cost of the trip. Larry is a full-time plumber. He is taking his family with him to a convention in Orlando featuring the latest in plumbing products and techniques. He plans to deduct most of his cost of the trip.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

Larry's trip to a plumbing convention is directly related to his full-time business as a plumber, making it a legitimate business purpose.

Question 20

The Business Purpose Concept means I. that the economic purpose of the transaction must exceed the tax avoidance motive. II. that the taxpayer's dominant motive for an expenditure is to reduce taxation.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The Business Purpose Concept means that the primary purpose of a transaction should be for a valid business reason, and not solely for tax avoidance. Thus, statement I is correct, but statement II is not necessarily true for all expenditures.

Quiz 5: Introduction to Business Expenses