Question 1

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 2

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. In order for a deduction to be allowed, it must meet all statutory requirements outlined in the tax law.

Question 3

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

According to the IRS, expenses must have the "dominant motive" of earning a profit in order to be deductible. This means that the primary reason for incurring the expense must be to further a business or investment activity, rather than for personal reasons or to simply reduce income taxes.

Question 4

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

Accepted Answer

The answer of Evelyn can avoid the 2 percent limitation...

Question 5

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

The expenses incurred by Bowen for opening his paint store can be claimed as deductible business expenses.

Question 6

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 7

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 8

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

Accepted Answer

A necessary expense is one that is considered ordinary and necessary in the taxpayer's line of work or business. It must be helpful and appropriate to the business activity and not personal in nature. Examples of necessary expenses include business-related travel, office rent, advertising expenses, and professional fees.

Question 9

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 10

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.

Question 11

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

Accepted Answer

Expenses incurred for the production of rental income, such as repairs, maintenance, and mortgage interest, are generally deductible for tax purposes and can be used to reduce the taxpayer's adjusted gross income. However, certain limitations and rules apply, and it is recommended to consult a tax professional for specific guidance.

Question 12

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

Only statement II is an example of a business purpose as dominant motive, as Larry is attending a convention related to his profession as a plumber. Statement I involves combining personal and business expenses, with the primary motive being the deduction of the cost of the family vacation.

Question 13

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 14

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 siding is considered a capital expenditure and must be depreciated over the useful life of the asset, rather than expensed in the current year.

Question 15

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 deduct his expenses related to photography from his income. Therefore, he will have to include the full $1,000 he earned in his income, but will not receive any benefit from the related expenses he incurred.

Question 16

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

According to IRS regulations, a business expense must be both ordinary and necessary in order to be deductible, and it must have a business purpose. The taxpayer must be able to show that the expense was incurred in order to carry out the trade or business.

Question 17

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 economic purpose of the transaction must exceed the tax avoidance motive, which is correctly described in statement I. Statement II is incorrect because the dominant motive for an expenditure should not be to reduce taxation, as this could indicate tax avoidance rather than a legitimate business purpose.

Question 18

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 19

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 20

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

Only the third test mentioned in the statement is correct. The other two criteria mentioned are not necessary for an activity to be considered a trade or business. The IRS considers various factors to determine if an activity is a trade or business, such as the taxpayer's investment of time and effort, the expectation of making a profit, and whether the activity is carried out in a businesslike manner.

Quiz 5: Introduction to Business Expenses

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.

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.

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

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

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.

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

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.

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

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.

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

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.

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

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

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.

Quiz 5: Introduction to Business Expenses

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.

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.

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

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

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.

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

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.

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

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.

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

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. ​

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

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

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.

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.