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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 21

Multiple Choice

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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) ? $\begin{array} { | l | r | } \hline \text { Airfare to New Jersey } & \$ 2,000 \\\hline \text { Meals } & 220 \\\hline \text { Lodging in New Jersey } & 450 \\\hline \text { Rental car } & 180 \\\hline\end{array}$

A) $2,850
B) $2,740
C) $1,850 if Shelley's AGI is $50,000
D) All of these are deductible if Shelley is reimbursed under an accountable plan.
E) None of the expenses are deductible - only employers can deduct travel expenses.

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Question 22

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Mike started a calendar year business on September 1^st of this year by paying 12 months rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

A) $12,000 under the cash method and $12,000 under the accrual method
B) $4,000 under the cash method and $12,000 under the accrual method
C) $12,000 under the cash method and $4,000 under the accrual method
D) $4,000 under the cash method and $4,000 under the accrual method
E) $4,000 under the cash method and zero under the accrual method

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Question 23

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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?

Ed is a self-employed heart surgeon who has incurred the following reasonable expenses. How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. $500 in meals while attending a medical convention in New York. $300 for tuition for an investment seminar "How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is _________.

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business. A necessary expense is an expense that is helpful or conducive to the business activity.

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction

Murphy uses the accrual method and reports on a calendar year. This year Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

Which of the following is a payment liability?

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

Which of the following is a true statement?

Which of the following cannot be selected as a valid tax year end?

Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: What amount of travel expenditures can Sam deduct?

Sole proprietorships must use the same tax year as the proprietor of the business.

Individual proprietors report their business income and deductions on:

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

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1^st of this year Mike received $15,000 for three outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next three summers beginning this year. How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

A fiscal tax year can end on the last day of any month other than December.