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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 41

Multiple Choice

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Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

A) A deduction for the insurance premium would offset taxable income without the potential for the proceeds generating taxable income.
B) The federal government does not want to subsidize insurance companies.
C) It is impractical to trace insurance premiums to the receipt of proceeds.
D) Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code.
E) This rule was grandfathered from a time when the Internal Revenue Code disallowed all insurance premiums deductions.

F) A) and E)
G) B) and E)

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Question 42

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Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

A) True
B) False

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Question 43

Multiple Choice

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For purposes of the business interest limitation, adjusted taxable income is defined as taxable income allocable to the business computed without regard to which of the following:

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $3 million this year. Taxable income was computed on $50 million of revenues and included $140,000 of interest income. The company paid $454,500 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Which of the following is a true statement?

Gabby operates a pizza delivery service. This year, she paid delivery personnel $18,000 in salary. She carefully documented the business use of the auto (11,700 miles this year), and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

Jones operates an upscale restaurant and he pays experienced cooks $36,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $40,800 per year. Which of the following is a true statement about this transaction?

The deduction for business interest expense is limited in 2020 to the sum of (1) business interest income and (2) 40 percent of the adjusted taxable income of the taxpayer for the taxable year.

A short tax year can end on any day of any month other than December.

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $13,400 in rebates and was liable for an additional $8,200 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Only half the cost of a business meal is deductible even if the meal is extravagant.

Which of the following is a payment liability?

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss that is not properly allocable to a trade or business.

Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $290 for the meal andseparately paid $250 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

Bill operates a proprietorship using the cash method of accounting, and this year he received the following:$100 in cash from a customer for services rendered this yeara promisefrom a customer to pay $200 for services rendered this yeartickets to a football game worth $250 as payment for services performed last yeara check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Which of the following expenditures is most likely to be deductible for a construction business?