EA2 Study Unit 5.2 5.4 Questions and Bonus PDF

1)[]{#anchor} []{#anchor-1}Gary Judd is an individual proprietor trading as Lake Stores, an accrual basis enterprise that had been using the allowance method for determining bad debt expense for both book and tax purposes. At December 31, 2022, Lake's allowance for credit losses ("bad debt reserve"...

1)[]{#anchor} []{#anchor-1}Gary Judd is an individual proprietor trading as Lake Stores, an accrual basis enterprise that had been using the allowance method for determining bad debt expense for both book and tax purposes. At December 31, 2022, Lake's allowance for credit losses ("bad debt reserve") was \$20,000. In Lake's 2023 budget, it was estimated that \$3,000 of trade accounts receivable would become worthless in 2023. However, actual bad debts amounted to \$4,000 in 2023. In Lake's 2023 Schedule C of Form 1040, Lake is allowed[]{#anchor-2} Answer (B) is correct.\ An accrual basis taxpayer includes trade receivables in gross income, and a trade receivable is deductible as a business bad debt to the extent it is worthless. The allowance method of deducting bad debts is not allowed, so Gary must use the specific write-off method. +-----------------------------------+-----------------------------------+ | 2)[]{#anchor-3}[]{#anchor-4} | []{#anchor-5}Dr. K, a dentist and | | | calendar-year taxpayer, has | | | consistently reported income and | | | expenses from his business on the | | | cash basis. All cash and checks | | | he receives are deposited and | | | included in income. K's records | | | for the current year reflect the | | | following information: | | | | | | What is the amount of K's bad | | | debt expense for the current | | | year?[]{#anchor-6} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ Answer (C) is correct.\ Dr. K has consistently reported income and expenses on the cash basis, and cash and checks received are deposited and included in income. Therefore, the \$2,000 in accounts receivable has not been included in income, and accordingly, no deduction will arise from uncollectible receivables. The recovery of an uncollectible receivable from 3 years ago of \$1,000 will be included in income and will not be netted against bad debt expense. Bad debt expense for the current year will be \$3,500; the \$500 in returned checks has been included in income, so a bad debt deduction is proper, and the \$3,000 business bad debt is also deductible. ------------------------------ ------------------------------------------------------------------------------------------------------------------------------- 3)[]{#anchor-7}[]{#anchor-8} []{#anchor-9}Which of the following may be deducted as a business bad debt by Mr. G, an accrual-basis taxpayer?[]{#anchor-10} ------------------------------ ------------------------------------------------------------------------------------------------------------------------------- []{#anchor-11} -- -- +-----------------------------------+-----------------------------------+ | 4)[]{#anchor-12}[]{#anchor-13} | []{#anchor-14}Landon, a sole | | | proprietor, made the following | | | loans in the current year. Two | | | loans were closely related to his | | | business operation, and the other | | | two were personal. | | | | | | The unpaid balance of each loan | | | that is not recoverable has been | | | written off. What is the total | | | maximum tax deduction Landon can | | | take for business and nonbusiness | | | worthless debt in the current | | | year?[]{#anchor-15} | +-----------------------------------+-----------------------------------+ | | fg | +-----------------------------------+-----------------------------------+ Answer (B) is incorrect. Wholly worthless nonbusiness debts are deductible. Therefore, the loan to B is also deductible. Answer (D) is correct.\ A partially worthless nonbusiness debt is not deductible (Reg. 1.166-5), and a wholly worthless nonbusiness debt is treated as a loss from the sale or exchange of a capital asset held for 1 year or less, i.e., a short-term capital loss \[Sec. 166(d)\]. Notice that the Sec. 1211 limit of \$3,000 for a capital loss deduction is not reached in this problem since only the loan to B creates a capital loss. Partially worthless business debts may be deducted under Sec. 166(a) to the extent they are specifically written off. Landon's bad debt deduction is ----------- -- ------------ A \$       0 B 1,000 C 1,000 D 2,000 Deduction \$4,000 ----------- -- ------------ Of the loss, \$1,000 is a short-term capital loss, and \$3,000 is a business bad debt deduction that reduces ordinary income. -------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 5)[]{#anchor-16}[]{#anchor-17} []{#anchor-18}The Flap Jack Partnership guaranteed a \$30,000 note for Elegant Restaurant, one of Flap Jack's customers, for a good faith business purpose. Elegant Restaurant filed for bankruptcy and defaulted on the loan after paying \$10,000 of the note. Flap Jack Partnership paid the bank the balance of the note. What is the amount Flap Jack Partnership can deduct as a bad debt? []{#anchor-19} -------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------- -------------------------------------------------------------------------------------------------------------------------------- 6)[]{#anchor-20}[]{#anchor-21} []{#anchor-22}Which of the following may be deducted as a business bad debt by Mr. Y, an accrual-basis taxpayer?[]{#anchor-23} -------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Answer (B) is correct.\ An accrual-basis taxpayer includes notes receivable in gross income, and a worthless note receivable is deductible as a business bad debt under Sec. 166(a).Answer (B) is correct. -------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------ 7)[]{#anchor-24}[]{#anchor-25} []{#anchor-26}With regard to deductible travel expenses when attending a convention, which of the following statements is false?[]{#anchor-27} -------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------ Answer (D) is incorrect.\ The meeting must be directly related to the taxpayer's trade or business for the deductions to be permitted. Answer (C) is correct.\ A taxpayer may deduct traveling expenses between the principal place of business and the place of business at a temporary or minor post of duty. When the taxpayer's family lives at the temporary or minor post of duty, the taxpayer may still claim travel expenses. Answer (A) is correct.\ Dr. Unsa's deduction is limited because, although he traveled outside the United States primarily for business purposes, more than 25% of his time was spent on nonbusiness activities. Therefore, he may deduct \$2,800 (70%) of the air travel costs, \$1,400 (70%) of his lodging costs, and \$350 of his meal expenses. The meal deduction is subject to the 50% limitation, which must be applied before the deductible amount can be figured. Thus, \$1,000 meal expenses subject to the 50% limit equals \$500. 70% of the \$500 is deductible (\$350). -------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- 9)[]{#anchor-28}[]{#anchor-29} []{#anchor-30}Which of the following may be deducted as a business bad debt by Mr. Leonard, a cash-basis taxpayer?[]{#anchor-31} -------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- Answer (A) is correct.\ An uncollectible business loan is a business bad debt under Sec. 166. Therefore, it is deductible. +-----------------------------------+-----------------------------------+ | 10)[]{#anchor-32}[]{#anchor-33} | []{#anchor-34}A self-employed | | | taxpayer usually works and lives | | | in Springfield, but in March of | | | the current year, the taxpayer | | | starts an extended engagement in | | | Indianapolis for an indefinite | | | period of time. How much, if any, | | | of the following monthly expenses | | | can the taxpayer take as an | | | expense on the taxpayer's | | | current-year tax return? | | | | | | []{#anchor-35} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ Answer (D) is incorrect.\ Neither the rent nor any portion of the meals, including the normally deductible 50%, is deductible. Answer (B) is correct.\ According to Rev. Rul. 75-432, if the period of work is or becomes indefinite, travel expenses are not deductible because the individuals are treated as though they changed the location of their tax homes to their work location. --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 11)[]{#anchor-36}[]{#anchor-37} []{#anchor-38}Jane is traveling to New York from Florida for a 2-day business event. Her total flight cost is \$350, and she is shipping display material for the event at a cost of \$100. While in New York, Jane had dry cleaning expenses totaling \$25, for which she left a \$10 tip. Which of these expenses are deductible? --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -- -- -- -- Answer (C) is correct.\ For travel within the U.S., expenses other than transportation (e.g., airfare) are 100% deductible if the primary purpose is business. In addition, sending baggage and sample or display material between the regular and temporary work locations, dry cleaning and laundry, and any tips paid are deductible. Note that all of these expenses must be made for business purposes when traveling away from home. --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 12)[]{#anchor-39}[]{#anchor-40} []{#anchor-41}Partiers Unlimited sent one of its employees to attend an association meeting on behalf of the company. It is customary, and good for business, for spouses to attend these meetings and participate in the social activities in the evenings. The employee took her spouse along for this purpose. Airfare for the employee was \$200, food at restaurants was \$100, and lodging was \$200. Airfare for the spouse was \$200, food at restaurants was \$100, and lodging was \$150. Partiers reimbursed its employee for these amounts but included \$450 on the employee's W-2 as compensation at the end of the year. How much, and in what manner, should Partiers deduct for these expenses?[]{#anchor-42} --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Answer (B) is correct.\ An employer may deduct reimbursements to an employee for business travel under Sec. 162(a), subject to the restrictions in Sec. 274. However, the expenses of an employee's spouse on a trip are not deductible, unless the spouse is an employee of the taxpayer, the travel of the spouse is for a bona fide purpose, and such expenses would otherwise be deductible by the spouse \[Sec. 274(m)(3)\]. It is not sufficient that the spouse is along for customary social activities. Therefore, the expenses relating to the spouse in this question are not deductible. Under Sec. 274(e), if an employer treats the nondeductible travel expenses as compensation to the employee, they may be fully deducted as compensation. Treating them as compensation requires withholding income tax, including the amounts on the employee's W-2, and deducting them in the employer's tax return as compensation. When the employee is reimbursed for the cost of meals, the 50% limitation applies to the party making the reimbursement. Therefore, Partiers may deduct the following: ----------------------------------- ------- Spouse's expenses as compensation \$450 Employee's expenses as travel Airfare \$200 Meals (\$100 × 50%) 50 Lodging 200 Deductible amount \$450 ----------------------------------- ------- If the employer chooses not to treat the spouse's expenses as compensation, they become a nondeductible expense. 1)Which of the following expenses is deductible in the current year?A.A businessman pays dues to an athletic club when membership is used for business purposes. Answer (A) is incorrect.\ Athletic club dues are not deductible under Sec. 274(a)(3), regardless of the level of business use. B.A taxpayer provides basketball tickets for a client and his wife as part of customer relations; the taxpayer is not present. C.A taxpayer takes a customer to lunch and discusses a business transaction immediately before the meal. Answer (C) is correct.\ The cost of a meal for a customer is considered a deductible business expense because customers fall under the business associate requirement, and the taxpayer was present at the meal. The expenditures qualify for deduction at the rate of 50% of the cost. D.A professor of Spanish incurs travel expenses during a trip to Spain when the purpose of the trip is to increase his understanding of the language and customs of Spain. === 4)Expenses for travel outside the United States are NOT allocated between business and personal days when A.All of the answers are correct. Answer (A) is correct.\ Generally, traveling expenses (including meals and lodging) of a taxpayer who travels outside of the United States away from home must be allocated between time spent on the trip for business and time spent for pleasure. When the trip is for not more than 1 week or when the time spent for personal reasons on the trip is less than 25% of the total time away from home, no allocation is required. B.The trip was not more than 7 consecutive days. Answer (B) is incorrect.\ Expenses for travel outside the U.S. are not allocated between business and personal days when a personal vacation was not a major consideration or at least 75% of the time was spent on business. C.A personal vacation was not a major consideration. D.At least 75% of the time was spent on business. === 5)With regard to deductible travel expenses when attending a convention, which of the following statements is false? A.If a taxpayer can show that his or her attendance benefits his or her trade or business, (s)he can deduct his or her and his or her family's travel expenses providing the expenses are reasonable. Answer (A) is correct.\ Travel expenses are not allowed for a spouse, dependent, or other individual who accompanies the taxpayer on a business trip unless such person is an employee of the person who is paying or reimbursing the expenses, the travel of such person serves a bona fide business purpose, and the expenses of such person are otherwise deductible. B.A taxpayer must reduce otherwise deductible travel expenses that (s)he pays by the reimbursements that (s)he receives from others for these expenses. C.Taxpayers are required to keep adequate records showing the amount, date, place, and character of expenses. D.A taxpayer cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless the meeting is directly related to his or her trade or business. Answer (D) is incorrect.\ The meeting must be directly related to the taxpayer's trade or business for the deduction to be permitted.  === 11)Derek Dunn received three employee achievement awards (one for length of service and two for safety achievements) during the year: a nonqualified plan award of a watch that cost \$250 and two qualified plan awards consisting of a computer that cost \$1,500 and a radio that cost \$400. What amount, if any, may the employer deduct for each qualified plan award? A.\$1,900 B.\$1,600 C.\$0 Answer (C) is correct.\ Employers may deduct up to \$400 in employee achievement awards as part of a nonqualified plan. The total limit is \$1,600 for qualified plans. However, the award plan is not qualified since the average award is \$717 \[(\$250 + \$1,500 +\$400) ÷ 3\], which exceeds the \$400 limit. Therefore, the qualified plan deductible amount is \$0. However, the employer may still take a \$400 unqualified plan deduction. D.\$2,150 Answer (D) is incorrect.\ The total amount of gifts (\$2,150) exceeds the qualified plan deduction limit of \$1,600. In addition, the plan does not meet the qualified plan average award requirement. ===\ 29)Which of the following statements is true regarding deductible travel expenses when attending a convention? A.Travel expense for attendance at a conference on investments is deductible if the taxpayer is seeking advice on suitable investments for the production of taxable income. B.Dry cleaning and laundry expenses while on a business trip away from home are not deductible. C.Appointment or election as a delegate to a convention is sufficient in itself to make that delegate's travel expense deductible. Answer (C) is incorrect.\ A taxpayer's appointment as a delegate to a convention does not, in itself, entitle the taxpayer to a deduction. A deduction is allowed for ordinary and necessary traveling expenses incurred by a taxpayer while away from home in the conduct of a trade or business. D.The convention agenda does not have to deal specifically with the official duties and responsibilities of the taxpayer's position. Answer (D) is correct.\ A deduction is allowed for ordinary and necessary traveling expenses incurred by a taxpayer while away from home in the conduct of a trade or business. The convention agenda does not have to deal specifically with the official duties and responsibilities of the taxpayer's position. 3)According to common law rules, which of the following is NOT one of the three factors employers must consider when determining whether a worker is an employee or independent contractor? A.Influence. Answer (A) is correct.\ Influence is not one of the three factors that employers must consider when determining whether a worker is an employee or independent contractor. The three factors are behavioral, financial, and type of relationship. B.Financial. C.Behavioral. Answer (C) is incorrect.\ Behavioral is one of the three factors that employers must consider when determining whether a worker is an employee or independent contractor. Whether or not the company controls or has the right to control what the worker does and how the worker does the job must be considered. D.Type of relationship. === 8)A taxpayer may NOT claim the qualified business income (QBI) deduction if (s)he has qualified business income from which of the following entities?A.Trusts. Answer (A) is incorrect.\ Trusts are qualified pass-through entities. B.S corporations.  C.Sole proprietorships. D.C corporations. Answer (D) is correct.\ The QBI deduction is available to noncorporate taxpayers who have qualified business income from qualified pass-through entities. Qualified pass-through entities include sole proprietorships, S corporations, partnerships, trusts, and estates. == 15)Mr. Pine, a self-employed engineer in Boston, traveled to Chicago in order to attend a course on new engineering techniques. He spent 2 weeks attending the course and remained in Chicago for an additional 6 weeks on personal matters. The air flight cost \$200, hotel \$600, meals \$320, and the tuition for the course \$500. How much of these expenses may Mr. Pine deduct on his return? A.\$714 B.\$690 Answer (B) is correct.\ A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business \[Sec. 162(a)\]. However, transportation is deductible only if the trip is primarily related to the taxpayer's trade or business (Reg. 1.162-2). If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since Mr. Pine spent 6 out of his 8 weeks in Chicago on personal matters, the cost of the flight to Chicago is not deductible. Meals and lodging must always be allocated between personal and business. Under Sec. 274(n), business meals are deductible at 50% of their cost. The expenses for 2 weeks out of 8 weeks are deductible. Educational expenses are deductible if the education maintains or improves skills required in the taxpayer's business (Reg. 1.162-5). Hotel (\$600 × 2/8) \$150 Meals (\$320 × 50% × 2/8) 40 Tuition 500 Total deduction \$690 C.\$500 Answer (C) is incorrect.\ An apportionable amount of hotel and meal expenses are deductible. D.\$890 === 20)Which of the following insurance premiums paid for policies related to a business is deductible as a business expense? A.Employee fidelity or performance bonds. Answer (A) is correct.\ Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. An expense is ordinary if it is customary in the kind of business conducted by the taxpayer and is not capital in nature. An expense is necessary if it is appropriate and helpful. Insurance to cover losses from employee malfeasance or nonperformance qualifies as such an expense. B.Self-insurance reserve funds. C.Owner's share of premiums on a split dollar life insurance plan. D.Insurance against loss of employer's earnings due to sickness or disability. Answer (D) is incorrect.\ Insurance on the loss of the employer's earnings is not a deductible expense. Only if it were for the reimbursement of overhead expenses would such premiums be deductible. === 21)Which of the following is considered a specified service trade or business (SSTB)? A.Collegiate athlete with name, image, and likeness compensation. Answer (A) is correct.\ In general, a specified trade or business (SSTB) is any trade or business in which the principal asset is the reputation or skill of one or more of its employees. In addition, any trade or business is an SSTB when it involves a principal whose earnings are from endorsing products/services, use of the principal's likeness/image/name/etc., or appearance fees for an event or media performance. Specifically excluded from SSTB status are architects, engineers, real estate agents/brokers, and insurance agents/brokers. B.Architect. C.Engineer. D.Insurance agent. Answer (D) is incorrect.\ Insurance agents are specifically excluded from SSTB status. === 23)Peterson, a self-employed accountant, took a client to a dinner to discuss a potential deal. The total amount paid for dinner was \$125 (including a \$25 tip). In addition, upon arrival, Peterson paid \$15 to have his car parked. What is the total amount of deductible expenses for this meal? A.\$50 B.\$70 Answer (B) is correct.\ The amount allowable as a deduction for a business meal expense is 50% of the actual expense for food or beverages. The deduction for related expenses, such as taxes, tips, and parking fees, follows the deduction for the meal. Transportation expenses to and from a business meal are 100% deductible. Therefore, the allowable deduction is 50% of \$140 (\$100 meal + \$25 tip + \$15 parking). C.\$140 D.\$62.50 Answer (D) is incorrect.\ The amount of \$62.50 fails to include the parking fees. === 1)The Jones Corporation was formed on December 1, 2024. Qualifying organizational expenditures were incurred and paid as follows: Incurred and paid in December of 2024 \$18,000 Incurred in December 2024 but paid in January 2025 5,000 Incurred and paid in February 2025 4,500 Assume that Jones Corp. makes a timely election under Sec. 248 to expense/amortize organizational expenditures over a period of 180 months. What amount may be deducted in the corporation's first tax year if it adopts a calendar year and the accrual basis of accounting for tax purposes? **A.\$5,100** **Answer (A) is correct.\ Section 248 allows a corporation to elect to amortize its organizational expenditures over 180 months, beginning with the month in which the corporation starts business. A taxpayer is deemed to have made the election. Since the total organization costs are less than \$50,000, the corporation is allowed to deduct the first \$5,000. Under the accrual method, a corporation reports income when it has been earned and expenses when they have been incurred. Therefore, Jones Corporation may deduct amortization of \$100 \[(\$23,000 -- \$5,000 expense) ÷ 180 months\] of the \$23,000 first year organizational expense, plus the \$5,000 expense allowance. Corporate cash-basis taxpayers can count organization expenses incurred in the first year but not paid until the second year.** B.\$5,000 C.\$5,125 D.None of the answers are correct. Answer (D) is incorrect.\ A correct answer is given. === 6)Zachary owns 40% of an S corporation that pays him \$70,000 of wages and \$10,000 of dividends and allocates him \$89,000 of income. What is Zachary's qualified business income (QBI)? A.\$70,000 B.\$159,000 Answer (B) is incorrect.\ QBI does not include employee compensation. **C.\$89,000** **Answer (C) is correct.\ QBI is the net amount of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer conducted within the United States and included or allowed in determining taxable income for the taxable year. It does not include income from wages paid \[i.e., wages are not from conducting a business (ownership) but are from more of an employee/service provider relationship\], and distributions from dividends are removed from net income in calculating DNI. Therefore, Zachary's QBI is only the \$89,000 of allocated income from the S corporation.** D.\$99,000 === 11)The Lux Corporation incurred \$10,000 in start-up costs when it opened for business in 2024. What is the minimum amortization period over which these expenses can be recovered? A.12 months. B.36 months. **C.180 months.** **Answer (C) is correct.\ For start-up expenses incurred, taxpayers are allowed to deduct up to \$5,000 of start-up and \$5,000 of organizational expenditures in the taxable year in which the business begins. Start-up and organization expenses that are not deducted must be capitalized and amortized over 180 months on a straight-line basis. Thus, the minimum amortization period is 180 months.** D.60 months. Answer (D) is incorrect.\ The amortization period was 60 months for organizational and start-up expenses incurred on or before October 22, 2004. === 12)During the current year, Mrs. Neal operated a business from her personal residence. She used 25% of her residence exclusively for business purposes. It was her principal place of business. The income and expenses attributable to the business portion of her residence were as follows: Gross income \$4,500 Supplies expense 2,400 25% of interest on residence 750 25% of taxes on residence 500 25% of maintenance, insurance, utilities on residence 350 Allowable depreciation on residence 1,300 Mrs. Neal's current-year return should reflect A. A net loss from business of \$800.  **B.No profit or loss from business and an \$800 expense carryover to the next year.** **Answer (B) is correct.\ Since Mrs. Neal uses 25% of her residence exclusively for business purposes, she may deduct 25% of the expenses of her residence plus any expenses directly applicable to the business. The deduction is limited to the excess of the net income derived from her business activity (not taking into account expenses of the home) over the deduction allowable whether or not the home was used for business purposes, e.g., interest and taxes. This limit is \$850 as computed below. Since the other home expenses are \$1,650 (\$350 maintenance, insurance, and utilities + \$1,300 depreciation), she will have an \$800 (\$1,650 -- \$850) expense carryover to the next year with no profit or loss from the business in the current year.** **Gross income \$4,500** **Less: Supplies (2,400)** **25% of interest(750)** **25% of taxes (500)** **Limit on other deductions \$ 850** C.A net profit from business of \$850 and an \$800 expense carryover to the next year.  D.No profit or loss from business and no carryover to the next year. Answer (D) is incorrect.\ There is an \$800 carryover of the nondeductible home expenses to next year. === 13)In 2024, Lakewood, a cash-basis partnership, incurred \$8,100 of organizational expenses that were not paid until 2025. The partnership began business on 7/1/2024 and elected to amortize organizational expenses over a 180-month period on its 2024 tax return. The partnership did not elect to take the \$5,000 deduction that the organizational expenses were eligible for. How much of the \$8,100 organizational expense can the partnership deduct in 2025? A.\$540 Answer (A) is incorrect.\ The expenses that are not deductible in 2024 due to nonpayment are deductible in the year in which they are paid in addition to any amortized amount for the year. **B.\$810** **Answer (B) is correct.\ Under Reg. 1.709-1(b), a partnership on the cash method of accounting is not allowed a deduction for organizational expenses for a taxable year with respect to any such expenses that have not been paid by the end of that taxable year. Portions of such expenses that would have been deductible under Sec. 709(b) in a prior taxable year if the expenses had been paid are deductible in the year of payment. The organizational expenses are amortized at \$45/month (\$8,100 ÷ 180 months). The deduction for 2025 is \$540 (\$45 × 12 months) plus \$270 (\$45 × 6 months) that was not allowed for 2024. If this were a corporation, the amount deductible would have been \$270 in 2024 and \$540 in 2025.** C.\$1,080 D.\$2,000 === 14)Tina owns a car dealership. Her books and records reflect the following items for the current year: Reserve for anticipated expenses associated with service contracts sold in the current year \$10,000 Direct expenses paid in an attempt to influence legislation of the local city council 1,000 Expenses paid for admission to an inaugural ball for a candidate for mayor 500 Cost to demolish a building used in her business 3,000 Undepreciated basis of demolished building 5,000 What is the amount Tina can deduct on her income tax return for the current year?A.\$18,000 B.\$9,500 Answer (B) is incorrect.\ The admission to the ball and the demolition expenses are not deductible. C.\$20,500 **D.\$1,000** **Answer (D) is correct.\ The reserve for anticipated expenses is not deductible in the current year. The taxpayer also may not deduct the expenses paid for admission to the inaugural ball. Political contributions, even indirect contributions such as attending a fundraiser, are generally not deductible. Although there is generally a denial of deduction for lobbying expenses, there is an exception for up to \$2,000 of lobbying expenses with respect to legislation of direct interest to the taxpayer. The taxpayer may deduct the \$1,000 expense paid to influence the legislation of the local city council. In addition, the taxpayer may not deduct either the demolition expenses or the undepreciated basis of the demolished building. However, these expenses may be added to the basis of the land.** === 15)During November and December of 2023, Doyle, Inc., incurred \$60,000 in potential market feasibility costs, \$72,000 in legal fees for setting up the corporation, \$21,000 in advertising costs for the opening of the business, and \$18,000 for the purchase of equipment. Doyle began business operations on January 1, 2024. If Doyle chooses to amortize its organizational and start-up expenses over the minimum 180-month period, how much can Doyle deduct as an amortization expense in 2024? A.\$11,400 Answer (A) is incorrect.\ The \$18,000 purchase of equipment is neither an organizational nor a start-up expense. B.\$5,400 **C.\$10,200** **Answer (C) is correct. Any start-up or organizational expenses incurred may be capitalized and amortized over a period of no less than 180 months that begins with the month in which the corporation begins business. Organizational expenditures include those that are incidental to the creation of a corporation, chargeable to capital account, amortizable over a limited life if they are expended incident to the creation of a corporation with such a life, and incurred before the first tax year ends (corporation) or when the first return is due (partnership). Start-up expenses include amounts paid or incurred to create an active trade or business, to investigate the creation or acquisition of a trade or business, and to engage in any activity for profit or for the production of income. The \$5,000 first year deduction for both types of cost expenses is nullified by the dollar-for-dollar reduction of cost or expense over \$50,000.** **Doyle incurred \$72,000 of organizational expenditures and \$81,000 (\$60,000 + \$21,000) of start-up expenditures. The amortization of the organizational expenditures would equal \$4,800 \[(\$72,000 ÷ 180) × 12\] and the amortization of the start-up expenditures would equal \$5,400 {\[(\$21,000 + \$60,000) ÷ 180\] × 12}. Thus, the total amount of amortization expense would equal \$10,200 (\$4,800 + \$5,400).** D.\$4,800 === 16)Jonathan, a blogger, is a sole proprietor who uses a room in his residence regularly and exclusively to meet with customers in the normal course of his trade or business throughout Year 1. Jonathan determines that the room is 535 sq. ft. and has a cost basis of \$10,000. Jonathan places the room in service on January 1, Year 1. Jonathan depreciates the room under Sec. 168 as nonresidential real property using the optional depreciation table that corresponds with the general depreciation system, the straight-line method of depreciation, a 39-year recovery period, and the mid-month convention. During the year, Jonathan earns \$9,000 of gross income from the business and pays the following business expenses: Supplies \$1,900 Advertising 500 Professional fees 200 Magazines/Subscriptions 625 Postage 175 **Total \$3,400** Jonathan also pays the following expenses related to his home during the year: Mortgage interest \$10,000 Real property taxes 5,000 Homeowners insurance 1,500 Utilities 2,400 Repairs 900 **Total \$19,800** Using the simplified option, what amount will Jonathan report on Form 8829 as depreciation? A.\$2,675 Answer (A) is incorrect.\ The amount of \$2,675 is calculated as \$5 × 535 ft. The total allowed deduction for the qualified business use of his home under the simplified option is limited to 300 feet or \$1,500. B.\$3,400  C.\$15,000 **D. \$0** **Answer (D) is correct.\ There are three categories of deductions for taxpayers using all or a portion of their home for business:** 1. **Itemized deductions** 2. **Ordinary and necessary business expenses that are unrelated to qualified business use** 3. **Expenses for business use of a home** **If the simplified option is selected for the third category (i.e., expenses for the business use of a home), the taxpayer simply multiplies the square footage of the business-use portion by \$5. However, no deduction for depreciation is allowed under the simplified option. Jonathan's basis for Year 1 depreciation is \$10,000 (i.e., cost allocation).** === 17)In 2024, John and George formed a partnership that began business on July 1, 2024. They spent \$4,000 in legal fees for negotiating and preparing the partnership agreement, \$2,000 for accounting services setting up the partnership's books, and \$1,000 in commissions associated with acquiring assets for the partnership. Assuming these are their only expenses in starting their partnership, what is the proper amortization expense for 2024 after any immediate expense?  A.\$233 **B.\$33** **Answer (B) is correct.\ A taxpayer, partnership, or corporation may deduct \$5,000 of organization costs of a business paid or incurred in the tax year in which the active trade or business begins (Sec. 195). A partnership or corporation may deduct a further \$5,000 of organizational expenditures incurred in the tax year in which the partnership or corporation begins business (Secs. 709 and 248). These organizational deductions are reduced dollar-for-dollar for amounts paid or incurred in excess of \$50,000. Any remainder may be deducted ratably over a period of 180 months beginning with the month in which the active trade or business, partnership, or corporation begins. The allowable organizational expenditures consist of the \$4,000 of legal fees and the \$2,000 of accounting services. Taking an immediate deduction of \$5,000 leaves an excess of \$1,000 to be amortized over 180 months. The total amortization for the 6 months in which the partnership operated is thus \$33 \[\$1,000 × (6 ÷ 180)\].** C.\$67 Answer (C) is incorrect.\ The amount of \$67 improperly includes the commissions or assumes 12 months of amortization. D.\$600 === 18)Mr. Langley uses 30% of his home regularly and exclusively for business purposes. Mr. Langley's net income from his business operation (before taking into account expenses of the home) is \$3,500. His total household expenses for the year are Utilities \$2,500 Depreciation 8,000 Insurance 600 Taxes 1,600 Interest 4,000 What is the allowable deduction for the business use of Mr. Langley's home in addition to amounts otherwise deductible. **A. \$1,820 ** **Answer (A) is correct.\ Since Mr. Langley uses 30% of his residence exclusively for business purposes, he may deduct 30% of the expenses of his residence plus any expenses directly applicable to the business. The deduction is limited to the excess of the net income derived from his business activity (not taking into account expenses of the home) over the deductions allowable whether or not the home was used for business purposes, e.g., interest and taxes. This limit is \$1,820 as computed below. Since the other home expenses are \$3,330 (\$750 utilities + \$180 insurance + \$2,400 depreciation), he will have a \$1,510 (\$3,330 -- \$1,820) expense carryover to the next year with no profit or loss from the business in the current year.** **Net income\$ 3,500** **Less:** **Interest (\$4,000 × 30%)(1,200)** **Taxes (\$1,600 × 30%) (480)** **Limit on other deductions \$ 1,820** B.\$3,500 Answer (B) is incorrect.\ The business use of the home deduction is limited to net income. However, interest and taxes would be allowable whether or not the home was used for business. C. \$0  D.\$5,010 === 19)Sally, a professional soccer player, decided to manufacture and sell her own line of cleats. She incurred the following expenses during the current year: Market research \$3,000 Leather 4,000 Setting up an accounting system 1,200 Attorney's fee to acquire a 7-year building lease 1,600 If Sally, a calendar-year taxpayer, begins business on October 1 but makes no sales during the year, what is the most she can deduct in the current year (including any immediate expensing allowed), rounded to the nearest dollar?A.\$9,800 B.\$5,800 C.\$5,013 Answer (C) is correct.\ Section 195 (as amended by the American Jobs Creation Act of 2004) allows a taxpayer to elect to expense up to \$5,000 of start-up costs for the tax year in which the business begins. Start-up expenditures are those paid or incurred in connection with investigating the creation or acquisition of an active trade or business, or with creating an active trade or business, and which, if paid or incurred in connection with the expansion of an existing business, would be allowable as a deduction in the year paid or incurred. Expenditures include (1) research of one's product and the market for it, (2) accounting fees, (3) the training of employees, and (4) the securing of suppliers. The leather does not qualify as a start-up expenditure. Sally has \$5,800 of start-up costs eligible for deduction; however, the deduction is limited to \$5,000 plus the excess amortized and deducted for 3 months of the current year. Thus, Sally is entitled to expense \$5,013 of her start-up costs. Calculation of Total Start-up Expenses Accounting fees \$1,200 Market research 3,000 Attorney's fee 1,600 Total start-up expenditures \$5,800 (deduction limited to \$5,000) Deduction of Amortized Excess Excess costs \$ 800 Amortization period ÷ 180 months = \$ 4.4 per month October-December ×  3 months Amortized total \$ 13 Total Deduction Immediate expensing \$5,000 Amortization for the year 13 Total deduction \$5,013 D.\$4,200 Answer (D) is incorrect.\ The attorney's fee does qualify as a start-up expenditure. === 20)Mr. G, a plumber, owns his own building, which he uses exclusively in his business. On January 1 of the previous year, Mr. G purchased a residence and began using the entire basement as an office and workshop for his business. The basement constitutes his principal place of business. The size of Mr. G's residence is 2,000 square feet, including the basement, which has an area of 800 square feet. During the current year, Mr. G's net income attributable to the business use of his home (before taking into account expenses of the home) was \$10,000. In addition, Mr. G incurred the following costs with respect to his residence: Mortgage interest \$15,000 Real estate taxes 2,500 Utilities 2,000 Insurance and maintenance expenses 2,500 Assuming \$1,500 of depreciation on the basement portion each year, what is Mr. G's depreciation deduction with respect to his residence under the regular method of home office deduction? A.\$1,456 B.\$1,200 Answer (B) is correct.\ Under Sec. 280A, a deduction for the business use of a dwelling unit also used as a residence is allowed only if a portion of the unit is used exclusively on a regular basis as the principal place of business or as a place of business to meet with patients or customers, or if it is a separate structure that is used in connection with the taxpayer's trade or business. The expenses of the residence must be apportioned based on the area used exclusively for business. Mr. G's business portion is 40% (800 ÷ 2,000 feet). However, the business deduction is limited to net income from the business activity (not taking into account expenses of the home) less the expenses deductible regardless of the business activity, e.g., interest and taxes. Under Prop. Reg. 1.280A-2(i)(5), expenses deductible only as a result of business use that are not adjustments to basis are deducted first, and then those business deductions affecting basis (e.g., depreciation) are deducted. Net income \$10,000 Mortgage interest (\$15,000 × 40%) (6,000) Taxes (\$2,500 × 40%) (1,000) Utilities (\$2,000 × 40%) (800) Insurance and maintenance (\$2,500 × 40%) (1,000) Limitation on depreciation \$  1,200 C.\$1,364 D.\$1,500 Answer (D) is incorrect.\ The full amount of the depreciation is \$1,500. Only a portion of the depreciation is deductible due to business income. === 22)The Lucky Corporation has just been formed. It has organizational costs that the corporation wishes to amortize. Which of the following tests must the Lucky Corporation meet before it can amortize the organizational costs? A.The costs could be amortized over the life of the corporation if the corporation had a fixed life. B.The costs are chargeable to a capital account. C.The costs are for the creation of the corporation. Answer (C) is incorrect.\ In order for an organizational cost to be eligible for amortization, it must meet all four of the following criteria: (1) incurred for the creation of the corporation, (2) chargeable to a capital account, (3) amortizable over a limited life, and (4) incurred before the first tax year ends (corporation) or when the first return is due (partnership). D.All of the answers are correct. Answer (D) is correct.\ Organizational expenditures include those that are incidental to the creation of a corporation, chargeable to a capital account, and expenditures that could be amortized over the limited life of a corporation if the corporation had a fixed life. In order for an organizational cost to be eligible for amortization, it must be (1) incurred for the creation of the corporation, (2) chargeable to a capital account, (3) amortizable over a limited life, and (4) incurred before the first tax year ends (corporation) or when the first return is due (partnership).Answer (D) is correct.\ Organizational expenditures include those that are incidental to the creation of a corporation, chargeable to a capital account, and expenditures that could be amortized over the limited life of a corporation if the corporation had a fixed life. In order for an organizational cost to be eligible for amortization, it must be (1) incurred for the creation of the corporation, (2) chargeable to a capital account, (3) amortizable over a limited life, and (4) incurred before the first tax year ends (corporation) or when the first return is due (partnership). === 24)Dale Corporation's book income before federal income taxes was \$520,000 for the current year ended December 31. Dale was organized 3 years earlier. Organization costs of \$330,000 are being written off over a 10-year period for financial statement purposes. For tax purposes, these costs are being written off over the minimum allowable period. For the current year ended December 31, taxable income is A.\$498,000 Answer (A) is incorrect.\ The book depreciation must first be added back before deducting the depreciation. B.\$553,000 C.\$531,000 Answer (C) is correct.\ Under Sec. 248, a corporation may elect to amortize its organizational expenditures over at least 180 months, beginning with the month in which the corporation begins business. Dale's taxable income is computed by adding back to book income the book amortization costs of \$33,000 (\$330,000 ÷ 10 years) and then deducting the maximum tax amortization amount of \$22,000 (\$330,000 × 12/180 months). Taxable income is \$531,000 (\$520,000 + \$33,000 -- \$22,000). NOTE: A taxpayer is deemed to have made the election. D.\$520,000 === 28)Corporation ZAM, a calendar-year corporation, started business on May 1 of the current year. The corporation incurred the following expenses relating to the organization of the business: Fee paid to state for incorporation \$3,600 Legal fees for drafting corporation charter and bylaws 9,600 Cost of printing stock certificates 2,400 Commission expense on sale of stock 4,600 Expenses of temporary directors 4,800 If Corporation ZAM elects to amortize all of its organizational expenses, what is its maximum allowable amortization for the year? A.\$160 B.\$800 Answer (B) is correct.\ Under Sec. 248, a corporation may elect to amortize its organizational expenditures over 180 months, starting with the month in which the corporation begins business. Organizational expenses are incurred incidental to the creation of the corporation. They are chargeable to a capital account, amortizable over the fixed life of the entity, and incurred before the first tax year ends (corporation) or when the first return is due (partnership). Regulation 1.248-1(b)(3) specifically excludes expenditures connected with issuing or selling shares of stock such as commission expenses and printing costs. Corporation ZAM's current year deductible amortization is Fee paid to state for incorporation \$  3,600 Legal fees for drafting corporation charter and bylaws 9,600 Expenses of temporary directors 4,800 Total organizational expenditures \$18,000 Current year amortization (\$18,000 × 8/180 months) \$  800 In addition to the current year amortization, the corporation may deduct \$5,000 in the tax year in which the corporation begins business.\ NOTE: A taxpayer is deemed to have made the election.Answer (B) is correct.\ Under Sec. 248, a corporation may elect to amortize its organizational expenditures over 180 months, starting with the month in which the corporation begins business. Organizational expenses are incurred incidental to the creation of the corporation. They are chargeable to a capital account, amortizable over the fixed life of the entity, and incurred before the first tax year ends (corporation) or when the first return is due (partnership). Regulation 1.248-1(b)(3) specifically excludes expenditures connected with issuing or selling shares of stock such as commission expenses and printing costs. Corporation ZAM's current year deductible amortization is Fee paid to state for incorporation\$  3,600 Legal fees for drafting corporation charter and bylaws 9,600 Expenses of temporary directors 4,800 Total organizational expenditures \$18,000 Current year amortization (\$18,000 × 8/180 months)\$  800 In addition to the current year amortization, the corporation may deduct \$5,000 in the tax year in which the corporation begins business.  *NOTE: A taxpayer is deemed to have made the election. --- shouldn\'t be \$5000 deducted from \$18000 before calculating amortizable amount?* C.\$750 D.\$1,200 Answer (D) is incorrect.\ The corporation started business on May 1st, not January 1st. = 30)B, a barber, is a sole proprietor who uses a room in his residence regularly and exclusively to meet with customers in the normal course of his trade or business throughout Year 1. B determines that the room is 350 sq. ft. and has a cost basis of \$10,000. B placed the room in service on January 1, Year 1. B depreciates the room under Sec. 168 as nonresidential real property using the optional depreciation table that corresponds with the general depreciation system, the straight-line method of depreciation, a 39-year recovery period, and the mid-month convention. During the year, B earns \$9,000 of gross income from the business and pays the following business expenses: Supplies \$1,500 Advertising 800 Professional fees 300 Magazines/Subscriptions 700 Postage100 Total \$3,400 B also pays the following expenses related to his home during the year: Mortgage interest\$10,000 Real property taxes3,000 Homeowners' insurance1,500 Utilities2,400 Repairs900 Total \$17,800 Using the simplified option, what amount will B report on Schedule C as "Expenses for business use of your home... "? A.\$1,500 Answer (A) is correct.\ There are three categories of deductions for taxpayers using all or a portion of their home for business: 1. Itemized deductions 2. Ordinary and necessary business expenses that are unrelated to the qualified business use 3. Expenses for business use of a home If the simplified option is selected for the third category (i.e., expenses for business use of a home), the taxpayer simply multiplies the square footage of the business-use portion (maximum of 300 sq. ft.) by \$5. B's simplified option expenses for business use of his home is \$1,500 (300 sq. ft. × \$5). No deduction for depreciation is allowed under the simplified option. B.\$3,400 Answer (B) is incorrect.\ The "total (business) expenses before expenses for business use of home" reported on Schedule C are \$3,400; however, the question asks for "expenses for business use of your home." C.\$0 D.\$13,000