Tax chapt 9

19
Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following expenditures and explain your solution.
Josh borrowed $50,000 from the First State Bank using his business assets as collateral. He

$0. The interest expense is not deductible because it is associated with tax-exempt income.

20
Josh purchased a piece of land for $45,000 in order to get a location to expand his business. He also paid $3,200 to construct a new driveway for access to the property.

$0. The cost of the land and driveway should be capitalized. They will provide "long-term benefits.

21
This year Josh paid $15,000 to employ the mayor's son in the business. Josh would typically pay an employee with these responsibilities about $10,000 but the mayor assured Josh that after his son was hired, some city business would be coming his way.

$10,000. Only amounts considered reasonable in amount are deductible. The excess salary payment of $5,000 to the mayor's son is not deductible either because it is unreasonable in amount or a bribe.

22
Josh paid his brother, a mechanic, $3,000 to install a robotic machine for Josh's business. The amount he paid to his brother is comparable to what he would have paid to an unrelated party to do the same work. Once the installation was completed by his

$0. The cost to install the machine should be capitalized as part of the cost of the machine. It is a cost necessary to operate the machine.

32
Ralph invited a potential client to dinner and the theater. Ralph paid $250 for the dinner and $220 for the theater tickets in advance. They first went to dinner and then they went to the theater.
What amount can Ralph deduct if, prior to the dinner, h

$235 (50% of the cost of the dinner and theater) is deductible.

33
Ralph invited a potential client to dinner and the theater. Ralph paid $250 for the dinner and $220 for the theater tickets in advance. They first went to dinner and then they went to the theater.
What amount can Ralph deduct if he and the client only

$235 (50% of the cost of the dinner and theater) is deductible. Entertainment is directly related to business if there is an active discussion aimed at generating revenue and the discussion occurs in a business setting. A restaurant is an acceptable busin

34
Ralph invited a potential client to dinner and the theater. Ralph paid $250 for the dinner and $220 for the theater tickets in advance. They first went to dinner and then they went to the theater.
What amount can Ralph deduct if he and the potential cl

$0 is deductible. The cost of entertainment that occurs in a setting with little possibility of conducting a business discussion, such as a theater or sports venue, will only be deductible if the entertainment directly precedes or follows a substantive bu

35
Ralph invited a potential client to dinner and the theater. Ralph paid $250 for the dinner and $220 for the theater tickets in advance. They first went to dinner and then they went to the theater.
What amount can Ralph deduct if the potential client de

$235 (50% of cost of the dinner and theater) is deductible. Business discussions with business associates are directly related to business. Business associates include anyone the taxpayer reasonably expects to do business with, such as customers, supplier

40
This year R drove 12,000 miles in his personal auto, of which 3,000 miles were for business. Total costs to operate his car were:
What amount can R deduct if he is self-employed?
What amount can R deduct if he is an employee?
SEE PIC

Standard mileage method
Actual method

52-53
Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses:
$250 fee to register for the conference, $300 per night for three night's lodging, $200

$1,800. Business was the primary reason for the trip.

54
Suppose that while Melissa was on the coast, she also spent two days sightseeing the national parks in the area. To do the sightseeing, she paid $1,000 for transportation, $800 for lodging, and $450 for meals during this part of her trip, which she con

$1,800. Sightseeing costs are not deductible, but since the primary purpose of the trip appears to be business (3 days business v. 2 days personal) the cost of her business trip remains deductible.

55
Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses:
$250 fee to register for the conference, $300 per night for three night's lodging, $200 for

$1,400. The airfare is not deductible because business is not the primary purpose of the trip.

56
Suppose that Melissa's permanent residence and business was located in San Francisco. She attended the conference in San Francisco and paid $250 for the registration fee. She drove 100 miles over the course of three days and paid $90 for parking at the

$398. Because her travel did not require her to be away from home overnight, meals are not deductible. See next slide.

58
Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios?
Her trip was entirely for personal purposes.

$0 is deductible. Travel is deductible only when incurred primarily for business.

59
Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios?
On the trip, she spent eight days on personal activities and two da

$0 is deductible. The trip does not appear to be motived primarily for business (2 days business v. 8 days personal).

60
Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios?
On the trip, she spent seven days on business activities and three

$700 is deductible. The trip appears to be motived primarily for business (7 days business v. 3 days personal). But it is foreign travel that lasts longer than one week. Hence, the cost of the airfare must be prorated.

61
Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios?
Her trip was entirely for business purposes.

$1,000 is deductible. Because personal vacation was not a consideration in making the trip, the full cost of the airfare is deductible.

64
J receives $100,000 of revenue from a qualified domestic production activity which has $55,000 of related expenses and $12,000 of wages. J has modified AGI of $47,000.

QDPR (revenue) $100,000
Allocated expenses (55,000)
QPAI (qualifying income) $ 45,000
Modified AGI is $47,000 so no limit
QPAI $ 45,000
DMD percentage x 9%
DMD $ 4,050
Not to exceed $6,000 (50% of wages of $12,000)

65
Andrew is considering starting a business of constructing and selling prefabricated greenhouses. There are three very different methods to constructing these greenhouses, and each method results in different revenue and cost projections. Below, Andrew

a. 68
b. 69

74
B's gross income is $50,000, composed of business income of $19,000 and nonbusiness income of $31,000. His deductions amount to $59,000, composed of business deductions of $31,000 and nonbusiness deductions of $28,000. His NOL is computed as follows:

Business income $19,000
Business deductions (31,000)
Business income/(loss) ($12,000)
Nonbusiness income 31,000
Nonbusiness deductions (28,000) Nonbusiness income/(loss) 3,000
Net operating loss ($9,000)

75
T's gross income is $50,000, composed of business income of $34,000 and nonbusiness income of $16,000. His deductions amount to $59,000, composed of business deductions of $28,000 and nonbusiness deductions of $31,000. His NOL is computed as follows:

Business income $34,000
Business deductions (28,000)
Business income/(loss) $ 6,000
Nonbusiness income 16,000
Nonbusiness deductions (31,000) Nonbusiness income/(loss) (15,000)
Net operating loss None

82
A tornado demolishes the roof of an office building owned by SPG. The value of the building before the tornado was $500,000 and after the tornado was $400,000. SPG's basis in the building was $350,000 and it received $80,000 of insurance reimbursement.

83
SPG may deduct a casualty loss of $35,000.

96
BBL, an accrual method taxpayer, signs a binding contract for PDP to provide repair services. BBL pays $1,500 and agrees to pay an additional $6,000 on the contract when the repairs are completed. The repairs will start in the fall of next year.
When c

BBL is receiving services from another. Thus, it can only deduct $7,500 next year because that is when all of the repair services will be received.

97
During November and December of the current year, XYZ provides installation services to ABC for an agreed price of $50,000. At the end of the year, XYZ has not yet billed for the services. Both ABC and XYZ are accrual method taxpayers.
When can XYZ cla

XYZ is providing services to another. As such, economic performance occurs as XYZ performs the services and XYZ can deduct the cost of the services in the current year.

98
Same facts.
When can ABC claim a deduction for the installation services received?

ABC is receiving services from another. As such, economic performance occurs as XYZ performs the services. ABC can deduct $50,000 for services in the current year.

99
On December 1, 20x1, ABC enters into a $100,000 snow removal contract with Snow Movers Co. The contract provides that the snow removal service will begin January 1, 20x2 and end March 15, 20x2. Both ABC and Snow Movers are accrual method taxpayers.
Whe

On December 1, 20x1, ABC enters into a $100,000 snow removal contract with Snow Movers Co. The contract provides that the snow removal service will begin January 1, 20x2 and end March 15, 20x2. Both ABC and Snow Movers are accrual method taxpayers.
ABC ha

101
In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin

$4,800. The entire premium is deductible under the 12-month rule because the insurance coverage does not exceed 12 months and does not extend beyond the end of next year.

102
In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin

$0. Even though the contract period is 12 months or less, Justin must capitalize the cost of the prepayment because the contract period extends beyond the end of next year.

103
In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin

$2,250. Because the length of the insurance coverage is longer than 12 months, Justin may only deduct the portion of the premium pertaining to this year, which is $2,250 (9 months � 24 months x $6,000).

104
In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin

$4,800. The 12-month rule for capitalizing expenditures applies to rent (but not interest) payments for a cash method taxpayer. In contrast, for an accrual method taxpayer both rent and interest are deducted over the period relating to the lease or loan t

105
Circuit Corporation (CC) is a calendar-year, accrual-method taxpayer. CC manufactures and sells electronic circuitry. On November 15, year 0, CC enters into a contract with Equip Corp (EC) that provides CC with exclusive use of EC's specialized manufa

$0 in year 0 and $20,000 in year 1. Because CC is leasing property from EC, economic performance on the contract occurs ratably over the five-year period from January 1 of year 1 through December 31 of year 5. CC is not allowed to deduct any of the expend

108
This year (year 0) Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract requires Elizabeth to pay the consulting firm $1,500 for each instance that Elizabeth requests

$0. Because the liability is contingent on a future event (increase in efficiency) occurring after the end of the year, the liability is not fixed. Therefore, as an accrual-method business, Elizabeth is not allowed to recognize any deduction for this cont

109
This year (year 0) Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract requires Elizabeth to pay the consulting firm $1,500 for each instance that Elizabeth requests

$0. Under the cash-method, Elizabeth can only deduct amounts paid to the consultants by the end of the year. Since she has not paid the consultants anything by year-end, so she could not deduct any expense associated with the contract.

117
XYZ estimates that about $1,000 of the receivables from its plumbing services will be uncollectible this year. Included in that estimate is a $300 amount owned by client P whose account is uncollectible.
What amount of bad debt expense may XYZ deduct

If XYZ uses the cash method, it would not be able to claim any deduction because it did not receive payment from client P. Thus, it has no basis in the uncollectible debt.
If XYZ uses the accrual method, it would be able to claim a deduction of $300 for t