BA304

Module 6-9

1. S is a cash basis, calendar year taxpayer. She operates Cloth R Us.

All of the store’s profits come from the sale of fabric. During the
year she paid the following expenses:

1. $3,000 premium for liability insurance covering her business.

The coverage runs from December 1, 2010 through November 30, 2013.
2. $10,000 for cloth, all of which is still on hand at the end of
the taxable year.
3. $2,000 for “points” related to obtaining a loan for the purchase
of her personal residence.
4. $1,200 for “points” related to obtaining a loan on rental
property.

S may deduct all of the expense incurred in 2010 for which item(s)?
a. 1
b. 1 and 2
c. 1, 2, and 3
d. 1, 3, and 4
e. 3

2. L operates a sole proprietorship that manufactures lawn sprinklers.

The business is an accrual basis, calendar year taxpayer. During the
year, the following transactions occurred.

1. In December, L contracted for $5,000 with a distinguished

products management firm, Y Research, to help him market his product
nation-wide. Y performed the services in the following year.
2. L has a long-time agreement with M Service Company to come once
a month to service certain equipment. The Company charges L $50 per
month. L accrues the fee at the end of each month and pays the bill
when it is received, usually in the following month. This year M was
extremely busy and was not able to perform its services for the
month of December until January of the following year.
3. L provides a one-year money back guarantee on his products. At
the close of the current year he estimated that the guarantees for
sprinklers sold during the year would cost him $1,500.

Indicate in which of the cases above L is entitled to accrue a

deduction.
a. 1
b. 1 and 2
c. 2
d. 2 and 3
e. 3

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3. Which of the following statements is true concerning deductions
“for” and “from” adjusted gross income (A.G.I.)?
a. A deduction from A.G.I. has no effect on the taxpayer’s
self-employment tax liability.
b. Corporations, like individuals, must classify their deductions
as deductions for and from A.G.I.
c. Misclassification of a deduction for A.G.I. has no effect on the
taxpayer’s tax liability, assuming the taxpayer itemizes her or his
deductions.
d. Misclassification of a deduction for A.G.I. never has an effect
on the taxpayer’s medical expense deduction.

5. B, a bank president, is a weekend potter. He regularly sells his

pots at crafts fairs and spends an average of ten hours a week
either making or marketing pots. Although he has made around $200
profit per year for the last two years from pottery sales, he tells
everyone that he would do it for free. This year he had a $1,000 net
loss due to increased entrance fees at the fairs. If B has been
making and selling pots for only three years and he makes an
election under § 183 to postpone IRS challenges, which of the
following is a true statement if B makes a profit next year?
a. He can carry forward this year’s $1,000 loss and deduct it for
A.G.I.
b. He is conclusively the owner of a for-profit business rather
than a hobby.
c. He may shift the burden of proof to the IRS, which must show
that the pottery activity is not a business.
d. He can postpone paying income tax on the profit until the
challenge is resolved.

6. R’s only profit-seeking activities involve operation of several

computer stores. She currently is considering undertaking a new
venture. To this end, she pays a C.P.A. $800 to perform a financial
analysis of the venture to determine whether to enter it. With
respect to the expenditure, R may
a. deduct the entire expense in the year incurred if the venture
involves operation of a professional sports franchise, and she
enters the venture.
b. deduct the entire expense in the year incurred if the venture
involves operation of a toy store, and she does not enter the
venture.
c. amortize the expenditure over 60 months if the venture involves
operation of a winery, and she does enter the venture.
d. amortize the expenditure over 60 months if the venture involves
another computer store, and she does not enter the venture.

7. After having his best three quarters of earnings ever, and with a
predicted strong fourth quarter, D, a sole proprietor who is a

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 calendar year, cash basis taxpayer in a manufacturing business, is
looking for ways to reduce his A.G.I. this year. Which of the
following would probably not generate a deduction for A.G.I.?
a. Expenses incurred in December for a big January ad campaign.
b. Selling assets below his adjusted basis in them.
c. Expenses incurred in providing information to the city council
on matters of direct interest to the taxpayer.
d. Buying life insurance on his key employees’ lives, with the
business as beneficiary.

8. M works for MND Corporation, whose headquarters are in

downtown Houston. The firm reassigned M to the real
estate division, Woodacres, whose offices are in a
nearby suburb, Conroe. The distance between the two
jobsites is 43 miles. While M was working downtown it
was 4 miles from his home to the office but the
Woodacres office was 40 miles from M’s home. M decided
that 40 miles was too far to commute, so early in 2002
he moved 25 miles to a new house that was 19 miles
from the Woodacres jobsite and 29 miles from the
downtown jobsite. The travel distance that determines
whether or not M’s moving expenses are deductible is
a. 19.
b. 25.
c. 36.
d. 40.
e. 43.

9. The moving expense provisions are designed to ensure

that deductions are granted only when expenses arise
from business concerns. Which one of the following
statements most correctly describes the operation of
the rules governing moving expenses?
a. A deduction is denied unless the taxpayer moves
more than some predetermined amount from his former
residence.
b. A deduction is denied unless the taxpayer’s
commute, absent the move, would have increased by more
than some predetermined amount.
c. A deduction is granted as long as a taxpayer’s
move is attributable to a job change.
d. A deduction is granted if the taxpayer obtains
either part-time or full-time employment at the new

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 job site.

10. J graduated from the University of Texas during the

current year and accepted a job in Kansas City. J
lived in Austin and moved to Kansas City to commence
work on June 1. J drove 700 miles pulling a trailer
with all of his belongings. J had rented the trailer
for $200. On June 1 he moved into an apartment and
lived there temporarily at a cost of $10 per day
through July 15. On July 16 he moved into his new
house. J will be able to claim a moving expense
deduction of
a. $0.
b. $291.
c. $500.
d. $591.
e. $741.

11. T’s employer provides an office for her in its

downtown headquarters. Which of the following
statements is true? (investments are not Trade or Bz)
a. T maintains an office in her home that she uses
to conduct work related to her rental property. Even
though the rental activities may be considered a
business, no deduction can be allowed because T’s
principal business is that of being an employee and
its primary location is downtown.
b. T regularly meets with clients of her employer’s
business in her home office, which is exclusively used
for such purpose. T is entitled to the home office
deduction without further inquiry.
c. T maintains a home office that is exclusively
used on a regular basis to conduct work regarding her

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 investment portfolio. No deduction is allowed.
d. None of the statements above are true.

12. T sold textbooks for a living by visiting different

teaching institutions and showing samples of various
books to professors. She typically carried about 100
books in her Volkswagen on her way from home to
various local colleges and universities that she
regularly called upon. Last year a sudden increase in
the number of textbooks revised caused T to increase
her quantity of samples from 100 to 300 books. To
carry all of the books, T rented a trailer that she
pulled behind her Volkswagen. T sought to deduct the
cost of the trailer on her tax return. T will
a. be allowed to deduct the cost of the trailer as
an additional cost attributable to carrying the items
that T needs for the cost of doing business normally.
b. not be allowed to deduct the cost of the trailer.
However, T could have deducted the additional cost of
hauling the new books if she had bought a larger car
and used the “same mode” of transporting them as
before.
c. not be allowed to deduct the cost of the trailer
because T is still essentially using the “same mode”
of hauling books as before, i.e., with a car.
d. be allowed to deduct the cost of renting the
trailer because she is not using the “same mode” of
hauling the new books that she used for the old ones.

13. R coaches the basketball team at Houston High School.

In preparation for the state playoffs he decided to
scout his probable opponent, which was playing in San
Antonio. On Friday afternoon, he left from school and
drove to San Antonio to watch the game. Later that
night he returned to school to work on plans for the
upcoming game. He incurred the following costs:
transportation, $25; meals, $5. The costs were not
reimbursed. The coach may deduct
a. $20.
b. $24.
c. $25.
d. $29.
e. $30.

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14. L flew from Chicago to Miami primarily for a business
meeting. The meeting lasted three days, so she stayed
in Miami for two additional days to enjoy the sunshine
and visit. With respect to the plane fare for the
trip, L should (domestic travel)
a. prorate the plane fare based on time devoted to
business and personal activities and deduct the
business portion.
b. divide the plane fare equally between business
and personal activities and deduct the business
portion.
c. deduct the entire plane fare.
d. deduct none of the plane fare.
e. none of the above.

15. In which case are deductions not allowed with respect

to the directly-related-to and associated-with tests
for entertainment expense?
a. Meal expense for client J and spouse at a
business lunch.
b. Cost of seven kegs of beer and 200 hot dogs for
the annual company picnic for employees and their
families.
c. Cost of wine and cheese to be distributed free to
guests and prospective buyers at a gallery opening.
d. Cost of a two-week vacation trip to Hawaii for
the company’s top salesperson, who reports the value
of the trip as taxable compensation.
e. All of the above are deductible.

16. After securing a large order of magic supplies, Q took

his customer to lunch. He paid $40, for which his
company, Novelties, Inc., reimbursed him. Which
statement is true? (full amount for the individual but
half for company)
a. Q may deduct $20.
b. Q includes $40 as income and deducts the entire
amount.
c. Novelties, Inc., may deduct $20.
d. Novelties, Inc., may deduct $40.
e. Both b and c are true.

17. J, a cash basis taxpayer, is the general manager of a minor league

baseball club. The corporate owner has promised J, in a valid
contract, a $5,000 bonus if attendance exceeded 250,000 this year.
Attendance was 250,070. The owner reneges on the $5,000 bonus.

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 Upset, J quits and goes to Florida.
a. J can treat the $5,000 that was not paid as a business bad debt.
b. J can treat the $5,000 that was not paid as a nonbusiness bad
debt.
c. J cannot deduct the $5,000 that was not paid.(no basis)
d. None of the above.

18. F’s furniture business suffered a substantial property loss due to

a recent earthquake. F’s insurance policy did not provide coverage
for damage by an earthquake. The property, which was totally
worthless after the quake, had been worth $60,000 (basis $20,000).
F’s A.G.I. this year before the casualty is $90,000. F is provided
some relief from his misfortune in that he may deduct
a. $10,900.
b. $11,000.
c. $20,000. (deduct the basis)
d. $60,000.

19. This year D’s hunting cabin worth $5,000 (basis $8,000) was
destroyed by fire. The cabin was uninsured. If D’s A.G.I. is
$40,000 this year, how much of the loss may be claimed as an
itemized deduction? (10% of 40,000) less 5,000 = 1000-100
a. $900
b. $4,000
c. $4,900
d. $5,000
e. Some other amount

20. Which of the following cannot create a net operating loss that can
be carried back or forward?
a. A loss from operating a sole proprietorship
b. A casualty or theft loss to personal-use property
c. A loss attributable to an interest in a partnership
d. A loss attributable to an interest in an S corporation
e. All of the situations above can create an NOL

21. Which of the following statements regarding the net operating

loss provisions is false?
a. The provisions generally allow a loss in one year to offset
income in other years.
b. Personal and dependent exemptions are deducted in computing
the net operating loss deduction.
c. A net operating loss may be carried back three years and
forward until it is exhausted.
d. In lieu of carrying back a loss, the taxpayer may elect to
carry the loss forward.
e. More than one but less than all of the statements above are
false.

22. H and M, married with two dependent children, operate a piano and
organ store. Their records for the current year revealed the

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 following:

Gross income from sales $175,000

Business operating expenses 250,000 -
Interest income from investment 6,000
Interest expense on home mortgage 9,000
Long-term capital gain (business) 3,000
Long-term capital loss (business) 3,500

Their net operating loss for the year is

a. $75,000.
b. $75,500.
c. $78,500.
d. $82,000.

23. A medical expense deduction is allowed for all of the following

items except
a. treatment affecting any function of the body.
b.expenditures for prescription medicines or drugs.
c.expenses paid for transportation essential to the rendition of
medical care.
d.expenses for health club membership.
e.medical care insurance premiums for taxpayer and dependents

24. P, a single taxpayer, had $12,000 of deductible medical expenses in

2010. His 2010 A.G.I. was $24,000. His insurer reimbursed P for
$11,000 of the expenses in 2011, and did not reimburse P for any
expenses during 2010. If P deducted all of his allowable medical
expenses on his 2010 return, how much of the reimbursement must be
included in gross income for 2011? (P’s itemized deductions for
2002 exceeded his standard deduction by $15,000.)
a. $0
b. $900
c. $10,000
d. $10,200 24,000 *.075= 1800 ---- 12000-1800 = 10200
e. $11,000

25. The real property taxes on R’s house are computed on a calendar
year basis and are due November 1st of each year. The realty taxes
on R’s house were $2,400 for 2010. R sold his house on June 1,
2010, before the property tax payment was due. How much of these
real property taxes are apportioned to and deductible by R as an
itemized deduction on R’s 2010 Federal income tax return?
a. $0
b. $993
c. $1,407
d. $1,999
e. $2,400

26. To deduct a contribution to a charitable organization, the

organization could be any one of the following except
a. a war veterans’ organization.

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 b. a corporation operated for scientific purposes.
c. a nonprofit volunteer fire company.
d. a needy family.
e. a state-supported university.

27. Which of the following is not deductible as a charitable

contribution?
a. Unreimbursed auto expenses on church business.
b. Reasonable lodging costs while away from home overnight on
business for a qualified charitable organization.
c. Fair market value of appreciated stock held for five months and
given to a church.
d. Fair market value of used clothing given to the Salvation Army.
e. Fair market value of land held as an investment for ten years
and given to a church.