Question 1

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 because Larry is attending a convention related to his profession as a plumber, whereas in statement I, Darren's primary motive for taking his Amway products with him on his family vacation to Disney World is for personal and not business purposes.

Question 2

Sheila extensively buys and sells securities.The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore,Shelia must be
A)a broker.
B)an active trader.
C)an active investor.
D)a securities' dealer.

Accepted Answer

Based on the information given, Sheila is not considered to be in a trade or business with the securities transactions she engages in, which rules out options A, B, and D. Therefore, the best option is C, which suggests that Sheila is an active investor who buys and sells securities as an individual, but not as a profession or trade.

Question 3

Sarah extensively buys and sells securities .The IRS has determined upon examination that she is in a trade or business concerning the securities' transactions and therefore,Sarah is
A)a day trader.
B)an active trader.
C)an active investor.
D)a securities' dealer.

Accepted Answer

The answer of Sarah extensively buys and sells securities .The...

Question 4

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:
$\begin{array}{lr}
\text { Sales revenues } & \$ 800,0000 \
\text { Business expenses } & (440,000 \
\text { Investment expenses } & (4,000) \
\text { Short-term capital gains } & 26,000 \
\text { Long-term capital losses } & \underline { (14,000)} \
\text { Taxable income } & \underline { \$ 368,000}
\end{array}$
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 5

Which of the following is/are trade or business expenses?
I.Solly incurs legal expenses related to real estate he leases to Bucko Burger Hamburger Haven for a parking lot.Solly does little but negotiate the lease every year..
II.Susan owns several rental apartments.She negotiates new rental contracts,arranges for repairs and maintenance,and handles all leasing activities.
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 answer of Which of the following is/are trade or...

Question 6

Which of the following individuals is involved in a trade or business?
I.Lil owns a farm near Lafayette,Indiana.She leases the property to Cal,who operates the farm for himself.Lil receives 10% of Cal's net income as part of the lease agreement but has no responsibilities for the farming operation.
II.Lorraine owns a warehouse located in Brooklyn NY.She paid $250,000 for the real estate several years ago.It is now appraised at over $1,000,000,but she still uses the building only to store her painting collection.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Neither Lil nor Lorraine is involved in a trade or business based on the provided scenarios. Lil is merely earning income from leasing her property without involvement in the farming operations, and Lorraine uses her warehouse for personal storage, not a business activity.

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

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 the expense must be necessary and ordinary for the business, and have the primary purpose of generating income. The other options (A, B, C, and E) are not sufficient reasons to make an expense deductible.

Question 9

Teresa,Terri,and Tricia operate Sassy Solutions,an exclusive boutique.Based on advice from Teresa's sister,a CPA,the three form a partnership.Teresa owns 50% and Terri and Tricia each own 25%.For the year,Sassy Solutions reports the following:
$\begin{array}{lr}
\text { Sales revenues } & \$ 600,000 \
\text { Business expenses } & (320,000) \
\text { Investment expenses } & (4,000) \
\text { Short-term capital gains } & 26,000 \
\text { Long-term capital losses } & \underline { (14,000)} \
\text { Taxable income } & \underline { \$ 288.000}
\end{array}$
For tax purposes,what amount will Sassy Solutions report to Teresa as her ordinary income from the partnership?
A)$144,000
B)$146,000
C)$148,000
D)$138,000
E)$140,000

Accepted Answer

The answer of Teresa,Terri,and Tricia operate Sassy Solutions,an exclusive boutique.Based...

Question 10

Business expenses include
I.expenditures that have a business purpose
II.expenditures that are incurred for the production of income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Both statement I and statement II are correct. Business expenses must have a business purpose and must be incurred in the process of earning income. Examples of legitimate business expenses include office rent, employee salaries, advertising fees, and supplies.

Question 11

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 12

Which of the following people is currently engaged in a trade or business?
I.Barry spends 4 hours a day 5 days a week managing his investment portfolio.He watches the market and buys and sells securities when he thinks the market is right.His investment strategy is to realize income from dividends and long-term gains from holding investments for appreciation in value.
II.Jennifer is a full-time realtor,and she owns a house that she rents to Barry and his family for $900 a month.Jennifer provides for the repairs and maintenance of the house,and she stops by monthly to collect the rent and visit with Barry and his family.
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 describes a person who is currently engaged in a trade or business. Jennifer is a full-time realtor who owns and manages a rental property, which generates rental income and requires her to provide maintenance and collect rent from tenants. Barry, on the other hand, is managing his investment portfolio as an investor and generating income from dividends and long-term gains, but this does not constitute a trade or business activity.

Question 13

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 14

Which of the following people are currently engaged in a trade or business?
I.Willie devotes 45 hours per week to betting on horse races.Although he intends to win large sums,he has failed to win the big one.He considers his betting activities his job and relies on his meager winnings to support his family.
II.Daryl owns 214 home sites in and around Orlando,Florida.He bought these vacant lots several years ago in hoping that they would appreciate in value so he could sell them at a profit.Because of the recreational activities in the area,the building lots are worth several times his original cost.He is getting the lots ready to sell this year.
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 I is correct. Willie is devoting a significant amount of time to his betting activities and relies on the winnings to support his family, which indicates that he is engaged in a trade or business. On the other hand, statement II states that Daryl owns vacant lots and is waiting for them to appreciate in value so he can sell them at a profit, which does not necessarily indicate that he is engaged in a trade or business.

Question 15

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 16

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. Therefore, statement I is correct. Statement II is incorrect because the Business Purpose Concept is specifically intended to prevent taxpayers from claiming that their dominant motive for an expenditure was to reduce taxation.

Question 17

A business expense includes
I.an expenditure that satisfies the dominant profit-motive requirement.
II.an expenditure that is incurred in a trade or business activity.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Both statements are correct. A business expense is an expenditure that is necessary and ordinary for the trade or business activity, and satisfies the dominant profit-motive requirement. It is deductible in determining the taxable income of the business.

Question 18

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 19

Which of the following is/are trade or business expenses?
I.Mahlon incurs expenses related to investing in stocks and bonds.Mahlon is a Sociology professor at State University but spends 10-15 hours per week on his investments.Almost 2/3 of Mahlon's annual income comes from his investments as dividends and interest.
II.Shaheen has expenses related to managing her portfolio of securities.The short-term trading of her securities generates most of her annual income.She has no other job.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Trade or business expenses are expenses incurred in connection with a trade or business. Statement I is not a trade or business expense because Mahlon's investments are not related to his job as a Sociology professor. Statement II is a trade or business expense because Shaheen's expenses are related to managing her portfolio, which generates her income and is her only job.

Question 20

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.

Quiz 5: Introduction to Business Expenses

Sheila extensively buys and sells securities.The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore,Shelia must be

Sarah extensively buys and sells securities .The IRS has determined upon examination that she is in a trade or business concerning the securities' transactions and therefore,Sarah is

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.

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

Business expenses include I.expenditures that have a business purpose II.expenditures that are incurred for the production of income.

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

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 business expense includes I.an expenditure that satisfies the dominant profit-motive requirement. II.an expenditure that is incurred in a trade or business 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.

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.