Schedule C or Schedule C-EZ may be used to report the net profit or loss from a partnership with business expenses of $2,500 or less.
False, Schedule C or Schedule C-EZ are used to report income and expenses for an individual taxpayer who operates a trade or business as a sole proprietor.
When a taxpayer uses the FIFO inventory valuation method, the assumption on which the method is based is that the inventory on hand at the end of the year consists of the most recently acquired items.
A taxpayer who adopts the LIFO method of inventory valuation for tax purposes may use the FIFO method for preparing financial statements.
False, If the LIFO method of inventory valuation is used for reporting taxable income, then the taxpayer must use LIFO when preparing his financial statements.
The taxpayer must use either the FIFO or LIFO method of valuing inventory, depending upon which method reflects the actual goods the taxpayer has on hand.
False, A taxpayer must choose an inventory valuation method and use that method each year. FIFO and LIFO are simply calculation assumptions; the goods that are actually on hand do not have to correspond to the assumptions of the method selected.
Once the election to use the LIFO inventory method has been made by a taxpayer, the inventory method may be changed only with the consent of the IRS.
Once a taxpayer uses the standard mileage method to determine the deduction for automobile expenses for the tax year, the standard mileage method must be used in all subsequent years.
False, If a taxpayer uses the standard mileage method in the first year, then the taxpayer may use the standard mileage method or the actual cost method in subsequent years, whichever gives the taxpayer the largest deduction as long as the taxpayer maintains adequate records of the actual costs.
The standard mileage rate for automobiles in 2014 is 56 cents per mile
If the taxpayer does not maintain adequate records of the car expenses (i.e., gas, tires, car insurance, etc.), the standard mileage rate cannot be used.
False, In order to use the actual cost method to calculate transportation deductions, the taxpayer must keep adequate cost records of the car expenses.
If a taxpayer works at two or more jobs during the same day, he or she may deduct the cost of transportation from one job to the other.
If a taxpayer takes a trip within the United States which is primarily for business, the cost of travel to and from the destination need not be prorated between the business and personal portion of the trip.
If an employee is transferred to a distant location for an indefinite period of time, the new location typically will be considered the employee’s new tax home.
The cost of transportation from New York to London for a trip that is for both business and pleasure may be deducted in full as a travel expense.
False, For business trips outside of the United States, the cost of traveling to and from the destination must be allocated between business and personal based on the number of business days compared to the total number of days outside the United States.
For an expense to qualify as a travel expense, the taxpayer must be away from home for at least 24 hours.
False, For an expense to qualify as a travel expense, the taxpayer must be away from home “overnight”. Overnight does not need to be 24 hours away from home; it just needs to be a period of time longer than an ordinary work day in which rest or relief from work is required.
The IRS has approved only two per diem methods to substantiate travel expenses, the high-low method and the meals and incidental expenses method.
False, The IRS has approved three per diem methods to substantiate travel expenses. The regular federal rate method is the third method.
Taxpayers who use their country club more than 50 percent for business may deduct the total amount of their membership dues.
False, Generally, club dues are not deductible. Nondeductible club dues include dues paid to country clubs, business luncheon clubs, and airline and hotel clubs.
The expense of a sales luncheon may be deductible (50 percent in 2014) even if no sale is made.
The expense of travel as a form of education is not deductible
The cost of a subscription to the New England Journal of Medicine is a deductible expense for a hospital intern
The cost of a blue wool suit for an accountant is a deductible expense.
False, To be a deductible expense, clothing needs to be (1) required as a condition of employment, and (2) not suitable for everyday use. A blue wool suit for an accountant is suitable for everyday use
A business gift with a value of $35 presented to a client and his nonclient spouse is fully deductible by the donor.
False, For purposes of the limitation on business gifts, a husband and wife count as one donee. Therefore, a taxpayer may deduct up to $25 per year for gifts to a client or potential client and to the client’s spouse. If the husband and the wife are both clients, then the husband may receive a gift up to $25 per year and the wife may receive a gift up to $25 per year.
There is a limitation of $25 per donee on the deduction of gifts to employees for length of service.
False, Costs of gifts of tangible personal property made to employees for length of service on the job or for safety achievement may be deducted up to a limit of $400 per employee per year, and up to $1,600 if the gift is made in conjunction with a “qualified plan”.
A gift to a foreman by a worker is considered business related and therefore subject to the $25 limit
False, Personal gifts made to a taxpayer’s supervisor are not deductible. Such gifts are considered nondeductible personal expenses.
Under the specific charge-off method, a deduction for a bad debt is taken when the debt is determined to be worthless
A deduction for a business bad debt is allowed to the extent that income related to the debt was previously included in taxable income.
Most taxpayers must use the specific charge-off method in calculating the bad debt deduction.
The home office deduction is an easy way for a taxpayer to show a loss on his or her tax return.
False, The home office deduction may not reduce the net income from the business below zero, except for mortgage interest and property taxes allocable to the office.
If a home office is used for both business and personal purposes, the home office expenses, such as rent or depreciation, should be allocated between the business and personal use and then deducted.
False, If a home office is used for both business and personal purposes, no deduction is allowed.
Net operating losses may be carried forward indefinitely.
False, For federal income tax purposes, net operating losses may be carried back 2 years and forward 20 years.
To file a Schedule C-EZ, the taxpayer must:
Have business expenses of $5,000 or less.
What income tax form does a self-employed sole proprietor usually use to report business income and expense?
In the current year, Johnice started a profitable bookkeeping business as a sole proprietor. Johnice made $38,000 in her first year of operation. What two forms must Johnice file for her business?
Schedule SE and C
Maria runs a small business out of her home. She has expenses of $2,000 per year and uses the cash basis method of accounting. Her only employee is her cousin who works for her part-time. What form should she use to report her business income?
Feedback: Schedule C-EZ cannot be used if the business has employees.
Stone Pine Corporation, a calendar year taxpayer, has ending inventory of $160,000 on December 31, 2014. During the year, the corporation purchased additional inventory of $375,000. If cost of goods sold for 2014 is $470,000, what was the beginning inventory at January 1, 2014?
Feedback: ($470,000 – $375,000 + $160,000)
Janine is a sole proprietor owning a small specialty store. The business records show that the cost of the store’s individual inventory items has been steadily increasing. The cost of the end of the year inventory is $125,000 and the cost of the beginning of the year inventory was $150,000. Janine uses the LIFO method of inventory valuation. Which of the following statements is true?
Janine would have a higher net income if she used the FIFO method of inventory valuation instead of the LIFO method.
Acacia Company had inventory of $400,000 on December 31, 2014. Other information is as follows:
Inventory 1/1/2014 500,000
What is the amount of Acacia’s cost of goods sold for 2014?
Feedback: ($500,000 + $1,500,000 – $400,000)
Jasper owns a small retail store as a sole proprietor. The business records show that the cost of the store’s inventory items has been steadily increasing. The cost of the end of the year inventory is $200,000 and the cost of the beginning of the year inventory was $250,000. Jasper uses the FIFO method of inventory valuation. Which of the following statements is true?
Jasper has apparently decreased the volume of items in his ending inventory as compared to the number of items in his beginning inventory.
Patricia is a business owner who is trying to determine her cost of goods sold for 2014. She bought 20 units of inventory at $11, then 26 units at $10, and finally 18 units at $14. She sold 30 units at an average price of $16 per unit in 2014 and uses FIFO for her inventory valuation. What was her cost of goods sold in 2014, assuming that there was no inventory at the beginning of the year?
Feedback: (20 x $11) + (10 x $10)
Greg, a self-employed plumber, commutes from his home to his office which is 10 miles away. He loads his truck for the day with the parts that he needs. Then he is off to see his first customer of the day, Mr. Smith. Mr. Smith is 5 miles away from the office. After Mr. Smith’s job, Greg goes to his next job, Martin’s Dry Cleaning, which is 21 miles away from Mr. Smith. Greg spends the rest of the day at Martin’s Dry Cleaning. From Martin’s Dry Cleaning, Greg goes home which is now only 7 miles away. How much can Greg count as deductible transportation miles?
Feedback: (5 miles + 21 miles) The trip to and from home is generally considered non-deductible commuting.
Deductible transportation expenses:
Do not include the normal costs of commuting
Which of the following taxpayers may not use the standard mileage method of calculating transportation costs?
A taxpayer who has a fleet of 10 business automobiles
Barry is a self-employed attorney who travels to New York on a business trip during 2014. Barry’s expenses were as follows:
How much may Barry deduct as travel expenses for the trip?
Feedback: [$560 + $40 + $350 + (50% x $200)]
If an employer chooses a per diem method of substantiation for travel expenses,
The meals and incidental expenses method requires actual cost records to substantiate lodging expenses.
During 2014, Harry, a self-employed accountant, travels from Kansas City to Miami for a 1-week business trip. While in Miami, Harry decides to stay for an additional 5 days of vacation. Harry pays $600 for airfare, $200 for meals, and $500 for lodging while on business. The cost of meals and lodging while on vacation was $300 and $500, respectively. How much may Harry deduct as travel expenses for the trip?
Feedback: $600 + (50% × $200) + $500
Which of the following items incurred while on travel is not considered a travel expense?
Cost of entertaining clients
Taxpayers who make a combined business and pleasure trip:
Must allocate the travel cost between the business and pleasure parts of the trip if the travel is outside the United States.
Which of the following expenses, incurred while on travel, does not qualify as a travel expense?
Gift purchased for a prospective customer ($20)
Mikey is a self-employed computer game software designer. He takes a week-long trip to Maui, primarily for business. He takes 2 personal days at the beach. How should he treat the expenses related to this trip?
The cost of all of the airfare and the expenses related to the business days should be deducted, while the expenses related to the personal days are not deductible.
If a per diem method is not used, which of the following items is not required as substantiation for the deduction of a travel expense?
All of the above must be substantiated
Carlos drives to Oregon to consult with a client. He works for 1 day and spends 3 days enjoying Oregon since the consultation was right before a 3-day weekend. His expenses were $175 to drive to Oregon and back, $600 for lodging, $50 for food on the day that he worked, and $125 for food on the other 3 days. How much of his travel expenses are deductible?
Gary is a self-employed accountant who pays $2,000 for business meals. How much of a deduction can he claim for the meals and where should the deduction be claimed?
50 percent, Schedule C deduction
Jack is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in meals, and $2,000 in green fees to entertain clients. He is also a member of the local Rotary club where he meets potential clients. The dues for the Rotary club are $1,200 a year. How much of the above expenses can Jack deduct as business expenses?
Feedback: [50% × ($4,000 + $2,000)] + $1,200
Linda is self-employed and spends $600 for business meals and $1,000 for business entertainment in 2014. What is Linda allowed to deduct in 2014 for these expenses?
Feedback: 50% × ($600 + $1,000)
Choose the correct statement:
In order to be deductible, dues and subscriptions must be related to the taxpayer’s occupation
In which of the following situations may the taxpayer take an education expense on Schedule C?
Henry, an administrative assistant, is taking an advanced Word computer program class through an adult school program.
Choose the correct answer.
Expenses for travel as a form of education are not deductible.
Which of the following is deductible as dues, subscriptions or publications?
Subscription to the “Journal of Taxation” for a tax attorney
Which of the following does not give rise to a business expense for uniforms or special clothing?
An accountant buys a business suit.
To be deductible as the cost of special work clothing or uniforms:
The clothing must not be suitable for everyday use and must be required as a condition of the job.
Sue is a small business owner who often gives gifts to clients. She gives a $40 gift to her client, Mr. Smith, and his wife. Sue spent $6 to wrap the gift. She also gave out 400 calendars with her company name on them. Each calendar cost $1. Sue also gave her secretary a $370 watch for his 10 years of service. How much of the above expenses may she deduct?
Feedback: $25 limit + $6 + (400 × $1) + $370
Nancy owns a small dress store. During 2014, Nancy gives business gifts having the indicated cost to the following individuals:
Mrs. Johns (a customer) $37 plus $3 shipping
Mr. Johns (nonclient husband of Mrs. Johns) $10
Ms. Brown (a customer) $22
What is the amount of Nancy’s deduction for business gifts?
Feedback: $25 limit + $3 + $22
During the 2014 holiday season, Bob, a barber, gave business gifts to 34 customers. The values of the gifts, which were not of a promotional nature, were as follows:
8 at $10 each
8 at $25 each
8 at $50 each
10 at $100 each
For 2014, what is the amount of Bob’s business gift deduction?
Feedback: (8 × $10) + (26 × $25 limit)
Ellen loans Nicole $45,000 to start a hair salon. Unfortunately, the business fails in 2014 and she is unable to pay back Ellen. In 2014, Ellen also had $20,000 of income from her part-time job and $12,000 of capital gain from the sale of stock. How much of the $45,000 bad debt can Ellen claim as a capital loss in 2014?
$15,000, with $30,000 carried forward to 2015
Feedback: Nonbusiness bad debts are considered short-term capital losses. Short-term and long-term capital gains may be offset by short-term capital losses. Ellen may offset $12,000 of her $45,000 bad debt from Nicole against the $12,000 capital gain from the sale of stock. In addition, Ellen may claim up to the annual limitation amount of $3,000 in short-term capital losses. In total, $15,000 of the bad debt can be claimed as a capital loss in 2014 with $30,000 in unused short-term capital losses carried forward.
Splashy Fish Store allows qualified customers to purchase items on credit. During 2014, Lisa, the owner of the store, determines that $3,500 of accounts receivable are not collectible. Which of the following statements is true with respect to Splashy Fish Store’s deduction for the uncollectible accounts receivable?
Splashy is not allowed a deduction for the uncollectible accounts if the income arising from the accounts has not been previously included in taxable income.
Which of the following would be a business bad debt if it were uncollectible?
A dentist, using the accrual basis of accounting, records income when it is earned and extends credit to a patient for services provided
Tim loaned a friend $4,000 to buy a used car. In the current year, Tim’s friend declares bankruptcy and the debt is considered totally worthless. What amount may Tim deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?
$3,000 short-term capital loss
Martin has a home office for his business as an agent for rock-and-roll bands. The business shows a loss of $2,000 before home office expenses. How should the home office expenses be treated?
Because of the business loss, home office expenses (other than mortgage interest and property taxes allocated to the office) cannot be deducted in the current year but can be carried forward to the next year.
Peter operates a dental office in his home. The office occupies 250 square feet of his residence, which is a total of 1,500 square feet. During 2014, Peter pays rent for his home of $12,000, utilities of $4,800, and maintenance expenses of $1,200. What amount of the total expenses should be allocated to the home office?
Feedback: [1/6 x ($12,000 + $4,800 + $1,200)]
Gene is a self-employed taxpayer working from his home. His net income is $7,000 before home office expenses. His allocable home office expenses are $8,000 in total. How are the home office expenses treated on his current year tax return?
Only $7,000 of the office expenses can be deducted; the remaining $1,000 can be carried forward to future tax years.
Bobby is an accountant who uses a portion of his home as his office. His home is 2,500 square feet and his office space occupies 1,500 square feet. Rent expense is $18,000 a year; utilities expense is $2,000 a year; and maintenance expense is $3,000 a year. What is the total amount of these expenses that can be allocated to his home office?
Kendra is a self-employed taxpayer working exclusively from her home office. Before the home office deduction, Kendra has $6,000 of net income. Her allocable home expenses are $10,000 in total. How are the home office expenses treated on her current year tax return?
Only $6,000 home office expenses may be deducted, resulting in net business income of zero. The remaining $4,000 of home office expenses may be carried forward and deducted in a future year against business income.
Richard operates a hair styling boutique out of his home. The boutique occupies 420 of the home’s 1,200 square feet of floor space. Other information is as follows:
Gross income from the boutique
Supplies for the boutique
Depreciation on total residence
Utilities for total residence
What amount of income or loss from the boutique should Richard show on his return?
Feedback: [$10,000 – $2,400 – 35% × ($12,000 + $6,000)]
Patrick has a business net operating loss of $70,000 in 2014. Patrick’s business generated significant taxable profits in 2012 and in 2013. Which of the following is true?
Patrick may offset income he generated in 2012 and 2013 with 2014’s net operating loss by carrying the net operating loss back to each of those tax years. The remaining net operating loss (if any) can be carried forward and used to offset future taxable income.
Karen has a net operating loss in 2014. If she does not make any special elections, what is the first year to which Karen can carry the net operating loss?
The net operating loss (NOL) provisions of the Internal Revenue Code
Are primarily designed to provide relief for trade or business losses.
In determining whether an activity should be classified as a hobby, the tax law provides a rebuttable presumption with regard to the profits or losses of an activity. Which of the following statements describes the profit/loss test which must be satisfied in order to meet the presumption that the activity is not a hobby?
The activity shows a profit for 3 of the 5 previous years.
Which of the following is not a factor that the IRS looks at to determine if a loss is from a hobby or from a business?
Whether the activity is owned and run by the taxpayer alone
Which of the following factors are considered by the IRS in evaluating whether an activity is classified as a business or a hobby
All of the above
In his spare time, Fred likes to restore old furniture and sell it to his friends. He is a lawyer by trade. During 2014, he sells $500 worth of furniture and has $21,000 worth of expenses. Which one of the following is true?
Fred’s deductions are limited to the income from selling furniture because he is engaged in a hobby.
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