Income Tax Chapter 3

Which of the following is not a test for the deductibility of a business expense?

expectation of profit test

In the current year, Mary started a profitable housekeeping business as a sole proprietor. She has ten housekeepers working for her and spends her time selling their services and coordinating her employees' time. Mary made $50,000 in her first year of ope

Schedule SE

Daniel is a self-employed consultant. Until this year he was always an employee. He comes to discuss his new business with you. As his tax accountant, you should

Discuss setting up a good record-keeping system for his new business, discuss the substantiation requirements for meals and entertainment, discuss the self-employment tax, as well as the income tax, on business earnings in order to help Daniel estimate what he might owe in taxes for the year, discuss the rules for deducting automobile expenses

Which of the following formulas represents the proper method of calculating cost of goods sold?

beginning inventory + purchases - ending inventory

If a taxpayer has beginning inventory of $25,000, purchases of $175,000, and ending inventory of $45,000, what is the amount of the cost of goods sold for the current year?

$155,000
25,000 + 175,000 - 45,000 = 155,000

Which of the following taxpayers may use the standard mileage method of calculating transportation costs

an attorney who uses his Porsche for calling on clients

Heather drives her minivan 953 miles for business purposes in 2017. She elects to use the standard mileage rate for her auto expense deduction. Her deduction will be

$510
953 x 0.535 = 509.855 = 510

Which of the following taxpayers is entitled to a travel expense deduction

A manager of a chain of department stores who works in the main store 3 weeks out of every month and visits distant branch locations on overnight trips during the remainder of the month

Which of the following expenses incurred while the taxpayer is away from home "overnight" is not included as a travel expense?

business gifts

Under the high-low method, the federal per diem amount is

the same for most cities but higher in certain locations

Joe is a self-employed information technology consultant from San Francisco, CA. He takes a week-long trip to Chicago primarily for business. He takes two personal days to go to museums and see the sights of Chicago. How should he treat the expenses relat

the cost of all the airfare and the business days should be deducted, while the cost of the personal days are not deductible

Which of the following expenses is deductible as an entertainment expense?

the cost of a cocktail party for clients paid for by a computer salesman at a computer fair

Which of the following is not likely to be a deductible meals and entertainment expense?

the annual cost of Don Dapper's country club membership. Don routinely entertains firm clients at the club

Which of the following taxpayers may not deduct their educational expense

a CPA who attends a course to review for the real estate agents' exam

Which of the following is likely a deductible business educational expense

Leah is a high school math teacher. The state Department of Education requires Leah to attend recertification courses every three years.

Which of the following is not deductible by the taxpayer?

All are deductible - subscriptions to journals in different fields

Which of the following employees are most likely permitted to deduct the cost of their uniform?

a cheerleader for the Los Angeles Chargers football team who purchases her own outfit

Which of the following business gifts are fully deductible

a gift to an employee, for 10 years of continued service, costing $250

Loren loaned a friend $9,000 as financing for a new business venture. In the current year, Loren's friend declares bankruptcy and the debt is considered totally worthless. What amount may Loren deduct on his individual income tax return for the current ye

$3,000 short term capital loss
*only $3,000 of net capital losses may be deducted against ordinary income in any one tax year

Kathy is a self-employed taxpayer working exclusively from her home office. Before the home office deduction, Kathy has $3,000 of net income. Her allocable home office expenses are $5,000 in total (includes $2,000 of allocated interest and property taxes)

Only $3,000 of home office expenses may be deducted, resulting in net business income of zero. The extra $2,000 of home office expenses may be carried forward and deducted in a future year against home office income.

Which of the following taxpayers qualifies for a home office deduction?

an accounting student who maintains a home office used exclusively for his business preparing tax returns

Carol maintains an office in her home where she conducts a dressmaking business. During the year she collects $4,000 from sales, pays $1,300 for various materials and supplies, and properly allocates $2,500 of rent expense and $500 of her utilities expens

$2,700
gross income = 4,000
less various materials and supplies = 1,300
net income = 2,700

Bonita earns $31,000 from her job, and she has $1,000 of interest income. She has itemized deductions and personal exemptions of $35,000. There are no casualty or theft losses in the itemized deductions. What is Bonita's net operating loss for the current

$0

Jim has a net operating loss in 2017. If he does not make any special elections, what is the first year to which Jim carries the net operating loss?

2015

Which of the following factors is not considered by the IRS in determining whether an activity is a hobby?

all of the above are considered - whether the activity is conducted like a business, the time and effort expended by the taxpayer, whether there has been changes in the methods of operation in an attempt to improve profitability, income and loss history of the activity

Stewie, a single taxpayer, operates an activity as a hobby. Brian, a different taxpayer, operates a similar activity as a bona fide business. Stewie's gross income from his activity is $5,000 and his expenses are $6,000. Brian's gross income and expenses

Stewie will report $0 income and Brian will report a $1,000 loss