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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 41

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Bob operates a clothing business using the accrual method over a calendar year. In October of last year, Bob contracted with his father, Tim, for consulting advice. Tim is a cash basis calendar year taxpayer and he billed Bob for $6,000 of consulting fees. This amount was comparable to amounts charged by other consultants (a reasonable amount). Bob paid $2,500 of the consulting fee by December 31^st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?

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$2,500 is deductible last year and $3,50...

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Question 42

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Sandy Bottoms Corporation generated taxable income (before the domestic manufacturing deduction) of $3 million this year. The total income included $2,350,000 of qualified production activities income. The company paid $460,000 in W-2 wages to generate the qualified production activity income. What is Sandy Bottom's domestic manufacturing deduction for the year?

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$211,500 = 9% × $2,350,000
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Question 43

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Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which is not deductible in any amount? 1. Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

David purchased a deli shop on February 1^st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31^st of this year as follows: $\begin{array} { | l | r | r | } \hline & \text { Receipts } & \text { Exrenses } \\\hline \text { February thu. December last year } & \$ 112,000 & \$ 84,500 \\\text { January this year } & 10,400 & 6,200 \\\hline\end{array}$ What income should David report from his sole proprietorship?

Shadow Services uses the accrual method and reports on a calendar year. This year Shadow agreed to a uniform cleaning contract with Odie Cleaning. Under the contract Odie bills Shadow for cleaning services as the services are provided. At year end Shadow paid Odie $2,350 for the services rendered during the year. In addition, Shadow paid Odie $700 for cleaning services expected in January of next year. What amount, if any, can Shadow deduct for the cleaning services this year?

This year Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments) . What amount of these expenses may Clark deduct as business expenses?

Judy is a self-employed musician who performs for a variety of events. This year Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

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

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?

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?

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last year?

Riley operates a plumbing business and this year the 3-year old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

Shelley is employed in Texas and recently attended a two-day business conference in New Jersey. Shelley spent the entire time at the conference and documented her expenditures (described below) . What amount can Shelley deduct as an employee business expense (before considering any miscellaneous itemized deduction limitations) ? $\begin{array} { | l | r | } \hline \text { Airfare to New Jersey } & \$ 2,000 \\\hline \text { Meals } & 220 \\\hline \text { Lodging in New Jersey } & 450 \\\hline \text { Rental car } & 180 \\\hline\end{array}$

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

After a business meeting with a prospective client Holly took the client to dinner and the theatre. Holly paid $290 for the meal and $250 for the theatre tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident. The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost. What is the amount of Don's casualty loss deduction?

A business generally adopts a fiscal or calendar year by using that year end on the first tax return for the business.