Question 1

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

Accepted Answer

False

Question 2

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.

Accepted Answer

Under the accrual basis of accounting, a business can only deduct warranty expenses in the year they are actually incurred, not when they are estimated or expected to occur.

Question 3

An expense that is incurred for the production of rent will be deducted for adjusted gross income.

Accepted Answer

Expenses that are incurred for the production of rental income, such as advertising, property maintenance, and property management fees, are deductible for adjusted gross income.

Question 4

To be deductible,the dominant motive for incurring an expense must be
A)the relationship to a business activity.
B)to reduce income taxes.
C)tax avoidance.
D)the intent to earn a profit.
E)personal.

Accepted Answer

The dominant motive for incurring an expense must be the intent to earn a profit in order for it to be deductible. This means that the expense must be directly related to a business activity and necessary for the generation of income. Personal expenses are generally not deductible. The motive of reducing income taxes or tax avoidance alone is not sufficient to make an expense deductible.

Question 5

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include
I.Personal expenses.
II.Trade or business expenses.
III.Expenses for the production of income.
​
A)Statements I and II are correct.
B)Statements I and III are correct.
C)Statements I,II,and III are correct.
D)Statements II and III is correct.

Accepted Answer

The legislative grace concept allows for the deduction of trade or business expenses and expenses for the production of income, but personal expenses are generally not deductible unless specifically allowed by law.

Question 6

Tom,Dick,and Harry operate Quality Stores.Based on advice from Tom's sister,a CPA,the three form a partnership.Tom owns 50%;Dick and Harry each own 25%.For the year,Quality Stores reports the following:
​

By how much will Tom's adjusted gross income increase because of the above?
A)$178,000
B)$180,000
C)$183,000
D)$184,000
E)$186,000

Accepted Answer

The answer of Tom,Dick,and Harry operate Quality Stores.Based on advice...

Question 7

In order to take a business deduction,the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

Accepted Answer

In order to take a business deduction, the taxpayer must be able to show that each expenditure was made for a valid business purpose. This means that the expense must be directly related to the business and necessary for its operation.

Question 8

Which of the following is an example of a business purpose as dominant motive?
I.Darren is a full-time plumber and a part-time Amway salesman.He is taking his family to Disney World and plans to take his Amway products with him so that he may deduct most of his cost of the trip.
II.Larry is a full-time plumber.He is taking his family with him to a convention in Orlando featuring the latest in plumbing products and techniques.He plans to deduct most of his cost of the trip.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement II is an example of a business purpose as the dominant motive, as Larry is attending a convention for his profession and plans to deduct most of his trip expenses as a business expense. Statement I is an example of personal travel with the intention to write off expenses for a side business, which is not a business purpose as the dominant motive.

Question 9

An individual should be indifferent whether an expense is deducted for or deducted from adjusted gross income.

Accepted Answer

Deductions for adjusted gross income (above-the-line deductions) reduce both adjusted gross income (AGI) and taxable income, potentially lowering the taxpayer's tax bracket and affecting eligibility for various tax credits and deductions that are AGI-dependent. Deductions from adjusted gross income (below-the-line deductions) only reduce taxable income. Therefore, the impact on tax liability and eligibility for certain tax benefits can differ, making an individual not necessarily indifferent between the two.

Question 10

The Business Purpose Concept means
I.that the economic purpose of the transaction must exceed the tax avoidance motive.
II.that the taxpayer's dominant motive for an expenditure is to reduce taxation.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The Business Purpose Concept means that the transaction must have a legitimate economic purpose beyond just avoiding taxes. Therefore, statement I is correct, and statement II is incorrect, as the dominant motive for an expenditure should not be to reduce taxation.

Question 11

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.

Accepted Answer

Since Morgan takes a standard deduction, he cannot itemize his deductions for the expenses he incurred as an amateur photographer. Therefore, he will have to include the $1,000 he earned in his income but cannot deduct his expenses from it.

Question 12

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.

Accepted Answer

This statement is true. Taxpayers can only claim deductions allowed by the tax law and that meet statutory requirements in order to reduce their taxable income.

Question 13

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

Accepted Answer

A necessary expense is defined as one that is ordinary and necessary for the taxpayer's trade or business. It must be appropriate and helpful to the taxpayer's income activity, and it must be reasonable in amount. Examples of necessary expenses include rent, utilities, equipment costs, and business travel expenses.

Question 14

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.

Accepted Answer

According to the tax law, start-up expenses up to $5,000 can be deducted in the first year of the business, and any remaining expenses can be amortized over 180 months. Since Bowen has incurred expenses of $8,000, he will be able to deduct all of these expenses in the first year of the business.

Question 15

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.

Accepted Answer

The first test - producing a profit every year - is one factor that the IRS may consider when determining if an activity is a business or a hobby, but it is not the only factor. The other two tests are also important in making this determination.

Question 16

A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

Accepted Answer

The answer of A taxpayer can take a deduction for...

Question 17

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.

Accepted Answer

As a cash basis taxpayer, Ona can still deduct the fair market value of her services provided in exchange for the music lessons, as this barter transaction is considered taxable income and the expense (music lessons) can be deductible if it qualifies as a business expense.

Question 18

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.

Accepted Answer

The cost of the new vinyl siding would be considered a capital expense and would need to be depreciated over its useful life rather than expensed in the current year.

Question 19

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.

Accepted Answer

The Tax Cuts and Jobs Act of 2017 suspended the home office deduction for employees from 2018 through 2025. Only self-employed individuals can claim this deduction during this period.

Question 20

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.

Accepted Answer

According to the IRS, if you rent out your property for 14 days or fewer in a year, you do not have to report the rental income.

Quiz 5: Introduction to Business Expenses

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

An expense that is incurred for the production of rent will be deducted for adjusted gross income.

To be deductible,the dominant motive for incurring an expense must be

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include I.Personal expenses. II.Trade or business expenses. III.Expenses for the production of income.

Tom,Dick,and Harry operate Quality Stores.Based on advice from Tom's sister,a CPA,the three form a partnership.Tom owns 50%;Dick and Harry each own 25%.For the year,Quality Stores reports the following: By how much will Tom's adjusted gross income increase because of the above?

In order to take a business deduction,the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

An individual should be indifferent whether an expense is deducted for or deducted from adjusted gross income.

The Business Purpose Concept means I.that the economic purpose of the transaction must exceed the tax avoidance motive. II.that the taxpayer's dominant motive for an expenditure is to reduce taxation.

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.

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.

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

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.

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.

A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

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.

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.

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.

Quiz 5: Introduction to Business Expenses

Evelyn can avoid the 2 percent limitation on her investment expenses by having her partnership pay them.

An expense that is incurred for the production of rent will be deducted for adjusted gross income.

To be deductible,the dominant motive for incurring an expense must be

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include I.Personal expenses. II.Trade or business expenses. III.Expenses for the production of income. ​

Tom,Dick,and Harry operate Quality Stores.Based on advice from Tom's sister,a CPA,the three form a partnership.Tom owns 50%;Dick and Harry each own 25%.For the year,Quality Stores reports the following: ​ By how much will Tom's adjusted gross income increase because of the above?

In order to take a business deduction,the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.

An individual should be indifferent whether an expense is deducted for or deducted from adjusted gross income.

The Business Purpose Concept means I.that the economic purpose of the transaction must exceed the tax avoidance motive. II.that the taxpayer's dominant motive for an expenditure is to reduce taxation. ​

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.

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.

A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

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.

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.

A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

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.

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.

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.

The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include I.Personal expenses. II.Trade or business expenses. III.Expenses for the production of income.

Tom,Dick,and Harry operate Quality Stores.Based on advice from Tom's sister,a CPA,the three form a partnership.Tom owns 50%;Dick and Harry each own 25%.For the year,Quality Stores reports the following: By how much will Tom's adjusted gross income increase because of the above?

The Business Purpose Concept means I.that the economic purpose of the transaction must exceed the tax avoidance motive. II.that the taxpayer's dominant motive for an expenditure is to reduce taxation.