Question 1

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

Accepted Answer

Deductions for adjusted gross income (above-the-line deductions) reduce both adjusted gross income (AGI) and taxable income, potentially lowering the taxpayer's tax bracket and affecting eligibility for various tax credits and deductions that are AGI-dependent. Deductions from adjusted gross income (below-the-line deductions) only reduce taxable income. Therefore, the impact on tax liability and eligibility for certain tax benefits can differ, making an individual not necessarily indifferent between the two.

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. He will have to include the $1,000 in income but will not get any benefit from the expenses.

Accepted Answer

According to the tax law, income from anything that qualifies as a trade or business is taxable, even if it is not the taxpayer's primary occupation. Therefore, Morgan will have to include the $1,000 in income. However, he can deduct the related expenses as business expenses from his income, which will reduce the taxable income and may reduce his tax liability.

Question 3

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 4

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 5

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 6

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 certainly a factor in determining whether an activity is a trade or business, it is not the only factor. The IRS looks at a variety of factors when making this determination, such as the taxpayer's investment in the activity, their expertise in the field, and their intent to make a profit. Additionally, the fact that an activity is not a taxpayer's livelihood does not automatically disqualify it from being considered a trade or business.

Question 7

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.
​

Accepted Answer

The Business Purpose Concept means that the economic purpose of the transaction must exceed the tax avoidance motive. Therefore, statement I is correct, but statement II is incorrect as it suggests that the taxpayer's dominant motive for an expenditure is to reduce taxation, which is contrary to the Business Purpose Concept.

Question 8

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

This is true, according to IRS regulations, a taxpayer must have a business purpose for each expenditure in order to deduct it as a business expense. Otherwise, the expense may be considered personal and not deductible.

Question 9

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 deemed appropriate and helpful to the taxpayer's income activity, such as expenses for supplies, advertising, rent, and utilities. These expenses can be deductible on tax returns, as they are necessary for the taxpayer to carry out their income-generating activities.

Question 10

Which of the following is an example of a business purpose as dominant motive?
I.Darren is a full-time plumber and a part-time Amway salesman. He is taking his family to Disney World and plans to take his Amway products with him so that he may deduct most of his cost of the trip.
II.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.
​

Accepted Answer

Statement II is an example of a business purpose as dominant motive because Larry is attending a convention for his profession, and the purpose of the trip is primarily related to his business as a plumber. In contrast, Statement I is an example of a personal purpose as dominant motive because Darren's primary reason for the trip is to take his family to Disney World, and he is hoping to deduct the cost of the trip through his Amway sales.

Question 11

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include
I.Personal expenses.
II.Trade or business expenses.
III.Expenses for the production of income.
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Accepted Answer

The legislative grace concept allows for the deduction of trade or business expenses and expenses for the production of income, but personal expenses are generally not deductible unless specifically allowed by law.

Question 12

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 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

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:
?
$$\begin{array} { l r } 
\text { Sales revenues } & \$ 800,000 \
\text { Business expenses } & ( 440,000 ) \
\text { Charitable Contributions } & ( 4,000 ) \
\text { Short-term capital gains } & 26,000 \
\text { Long-term capital losses } & ( 14,000 ) \
\text { Taxable income } & \$ 368,000
\end{array}$$
By how much will Tom's adjusted gross income increase because of the above?

Accepted Answer

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

Question 15

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 16

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

The expenses incurred for opening the paint store can be treated as start-up costs and can be deducted in the year the business begins operations. Therefore, Bowen will be able to deduct all the $8,000 expenses.

Question 17

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 18

Evelyn can reduce her adjusted gross income by having her partnership pay her charitable contributions rather her paying them.

Accepted Answer

Charitable contributions must be made directly by the individual to qualify for a tax deduction on their personal tax return; having a partnership pay them does not reduce an individual's adjusted gross income.

Question 19

To be deductible, the dominant motive for incurring an expense must be

Accepted Answer

The dominant motive for incurring an expense must be to earn a profit in order for it to be deductible. If the primary purpose of the expense is personal or for tax avoidance, it is not deductible. The relationship to a business activity is important, but it is not the only factor in determining deductibility. Similarly, the desire to reduce income taxes is not sufficient to make an expense deductible if it is not also incurred for a profit-oriented purpose.

Question 20

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

Deductions must be allowed by the tax law and meet all statutory requirements to be used to reduce taxable income.

Quiz 5: Introduction to Business Expenses