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ACTG-Ch5

Considered a trade or business
active trader
Not considered a trade or business
active investor
This is met when the existence and the amount of a liability have been established
all-events test
This is met when services or property are provided to the taxpayer
economic performance
Appropriate and helpful
necessary expense
Normal, common, and accepted but not necessarily regularly recurring.
ordinary expense
Specifically disallowed.
personal expense
Problems with this generally arise with related parties
reasonable expense
Cost of investigating a new trade or business that the taxpayer enters
amortizable or deductible expense
Cost of a new roof for office building
capital expenditure
Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
hobby expense
Deductibility depends on whether the area is used exclusively for trade or business activities.
home office deduction
Expenditure to influence legislation
lobbying expense
Automobile used 75% for business.
mixed-use asset
Investment expenses on municipal bonds
non-deductible expense
Safety-deposit box for taxable investments
production-of-income expense
Can be separated into two classifications
safety-deposit box for taxable investments
Deductibility depends on income and amount of personal and rental use
vacation home expense
3. 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.
True False
t
4. In order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.
True False
t
5. An individual is indifferent whether an expense is deducted for or deducted from adjusted gross income.
True False
f
6. Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.
True False
f
7. An expense that is incurred for the production of rent will be deducted for adjusted gross income.
True False
f
8. 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.
True False
f
9. A necessary expense is one that is appropriate and helpful to the taxpayer’s income activity.
True False
t
10. 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.
True False
f
11. 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.
True False
t
12. 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.
True False
t
13. 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.
True False
f
14. 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.
True False
f
15. A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.
True False
f
16. 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.
True False
f
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.
True False
f
26. Sheila extensively buys and sells securities. The IRS has determined upon examination that she is not in a trade or business concerning the securities’ transactions and therefore, Shelia must be A. a broker. B. an active trader. C. an active investor. D. a securities’ dealer.
c
27. Sarah extensively buys and sells securities . The IRS has determined upon examination that she is in a trade or business concerning the securities’ transactions and therefore, Sarah is A. a day trader. B. an active trader. C. an active investor. D. a securities’ dealer.
b
43. All of the following are required test for the deduction of a business expense except? A. GAAP approved. B. Ordinary. C. Necessary. D. Business purpose. E. Reasonable in amount.
a
44. Portia, a CPA, operates a financial and tax planning service. During the months of February, March, and April of every year, she hires graduate tax students from The University of Chicago as interns. This year she hires 4 interns. One is her brother, Sidney. She pays all interns except Sidney $20 per hour for help with tax return preparation and tax research. Sidney receives $25 an hour. She cannot deduct the full amount of Sidney’s hourly wages because the expense is not A. appropriate. B. ordinary. C. necessary. D. reasonable.
d
47. Which of the following is a currently deductible trade or business expense. A. $ 5,000 trustee fees paid to a bank to manage tax-exempt securities. B. $ 12,000 fee paid to a marketing firm for a market analysis for a new business. C. $15,000 fee paid to a TV station to advertise a new product. D. $20,000 to an attorney to defend title to a new patent. E. All of the above are currently deductible expenses.
c
50. Which of the following requirements doesnot have to be met for a business or investment expense to be deductible: A. Be ordinary and necessary. B. Be reasonable in amount. C. Be recurring. D. Be the taxpayer’s own expense. E. All of the above must be met.
c
51. Which of the following is not deductible? A. Expenses related to earning dividends on a portfolio of “blue chip” stocks. B. Expenses related to interest income from municipal bonds. C. Legal expenses related to rental real estate property. D. Medical expenses of the taxpayer’s dependent child.
b
52. Kelly buys a new Lexus for $48,750 in the current year to use in her commercial real estate business. Kelly cannot deduct the cost of the automobile in the current year, because A. it is unreasonable in amount. B. it is not a regularly recurring item. C. it is a capital expenditure. D. it is not necessary
c
63. Which of the following can be deducted as a trade or business expense? A. Lobbying expenses to influence taxpayers. B. Political contribution to elect a local Congressman. C. Illegal bribes to government D. Rent paid on a office to run an illegal gambling operation. E. None of the above can be deducted.
d
64. Oscar drives a taxi on weekends. In maximizing the amount of fares he earns, he occasionally gets tickets for speeding. Oscar figures that as long as he keeps his traffic violations under $100 over a weekend, he can more than offset those costs with additional fares. What is/are the tax effect(s) of Oscar’s speeding ticket costs? A. The costs are deductible because they are ordinary and necessary expenses directly related to the business. B. The costs are deductible because they have a business purpose and the business is not illegal. C. The costs are not deductible because the business activity is illegal. D. The costs are not deductible because they are due to violations of law.
d
65. Which of the following expenditures or losses incurred in the context of a trade or business activity is deductible at the time it is incurred? A. Aaron owns a local restaurant. He pays the local health inspector a fee of $125 per week, as provided by city regulation. B. Beth owns a local delivery company and pays $750 in parking fines during the year with respect to her delivery vehicles. These fines were unavoidable in the context of her business activity. C. Brad hires the son of the police chief as the night watchman at his business. The son is paid at the same weekly rate as other night watchmen in the area, but he does not show up for work on a regular basis. D. Dotty owns a local nightclub that features live music. She pays $4,600 to purchase a full page ad in the local newspaper urging citizens to vote against a noise ordinance in the next election that will force her out of business if passed.
a
66. Bruce operates an illegal drug business. Which of the following is deductible? A. Commissions paid to dealers. B. Rent for a warehouse. C. Bribes paid to local police. D. Cost of drugs sold. E. Interest on debt to finance the purchase of inventory.
d
67. Michael operates an illegal cock fighting business. Which of the following expenses is currently deductible? A. Fines paid to the local authorities. B. Bribes paid to local police. C. Rent expense on the enterprise’s building. D. Expenditures to acquire bar and kitchen equipment. E. None of these expenses are currently deductible.
c
110. In which of the following circumstances would a cash basis taxpayer be required to account for an item of income or deduction under the accrual method of accounting? A. Alice receives advance payment for services that she will perform and complete by the end of the following tax year. B. Ben paid his business property taxes at year-end even though they were not due until the end of January. C. Cheryl received six months of pre-paid rent on her rental property just before the end of the year. D. Donald prepaid a one-year service contract on his copy machine just before year-end. E. A cash basis taxpayer will not be required to use the accrual basis method of accounting in any of the above circumstances.
e
112. If someone provides a taxpayer with either property or services, economic performance occurs when A. The taxpayer actually uses the property. B. The property or services are actually provided. C. The liability to pay for the property or services exists. D. The taxpayer pays the other person for the property or services.
b
124. For its financial accounting records Addison Company uses the allowance method to account for bad debts and estimates the balance in the “Allowance for Bad Debts” account using the aging method. For tax purposes, the allowance method cannot be used. The rationale for not allowing this method is A. The arm’s length transaction concept has not been met. B. The all-events test has not been met. C. The Business Purpose Concept has not been met. D. Lack of constructive payment.
b

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