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Tax Segment F-3 - Business Expenses
In this tax topic you will learn how deduct common business expenses and what is and is not deductible. In this tax lesson you'll also become aware of the specific expenses that are deductible. Business expenses are the costs of carrying on a business and they are normally deductible as long as the business is operated to make a profit. Here, you will learn what you can deduct, and how much to deduct when there are limits and when you can deduct the business expenses. In addition, you will encounter information on not-for-profit activities and the limitations imposed on them. Student Instructions: Print this page, work on the questions and then submit test by mailing the answer sheet or by completing quiz online. Instructions to submit quiz online successfully: Step-by-Step check list Answer Sheet Quiz Online
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What is the amount Ms. Smith may deduct as real estate taxes on her commercial real estate for 2009?
A. $2,955. 10. Sandy and Buffy formed the S&B Partnership in November of 2009. They began business operations in December 2010. During 2010 they incurred the following costs:
What is the maximum dollar amount that S&B Partnership can elect to amortize as organizational costs?
A. $5,000. 11. Which of the following fringe benefits for meals is subject to the 50% deduction limit?
A. Meals furnished to your employees at the work site when you operate
a restaurant. 12. To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Which of the following would not qualify for a percentage depletion deduction?
A. Natural gas well. 13. Michael James purchased a travel agency on July 1, 2010, and immediately took over the business. The purchase contract included the following items as part of the purchase price:
What is the proper amount of Michael's Internal Revenue Code 197 amortization expense for 2010 assuming Michael is a calendar year taxpayer?
A. $90,000. 14. In 2009, Rex, a sole proprietor of Bay View Wrecking, had gross income of $200,000, a business bad debt deduction of $6,000, and other expenses of $156,000. Bay View Wrecking employed the accrual method of accounting and used the specific charge-off method for bad debts. In 2010, Bay View Wrecking recovered $4,500 of the $6,000 previously deducted in 2009. What is the correct way for Rex to report this recovery?
A. Report $4,500 as "Other Income" on Schedule C in 2010. 15. The FX Partnership manufactures garden hoses for sale. In the month of January, its sales were $80,000. During that month, the partnership had:
What is the cost of goods sold for the FX Partnership for the month of January?
A. $79,585. 16. Matt and Jason, Partners in the M & J Partnership began business on June 15, 2009. The business incurred the following expenses prior to June 15th:
What is the cost of improvements?
A. $108,500. 17. Between November 1 and December 1, 2010, you paid a total of $52,000 in start-up costs to create a new business. The business opened its doors on December 15, 2010. Which of the following is a permissible election for treatment of the $52,000 in start-up costs you paid?
A. Amortize $52,000 over a 15-year period. 18. Richard, a self-employed attorney, began a fishing guide business in 2004. He reports income and expenses from this fishing guide activity on a Form 1040 Schedule C separate from his reported earnings as an attorney. The fishing guide business reported net losses each year while Richard's attorney business showed significant net earnings in each of the years from 2004 to 2009. In 2010 Richard's business as an attorney showed a net profit of $50,000. Richard's fishing guide business had the following income and expenses in 2010:
Richard has itemized deductions that he will report on Schedule A of his 2010 Form 1040. How much depreciation deduction can Richard report from his fishing guide business activity in 2010?
A. $(3,000). 19. John and George formed a partnership that began business on July 2010. They spent $4,000 in legal fees for negotiating and preparing the partnership agreement, $2,000 for accounting services setting up the partnership books, and $1,000 in commissions associated with acquiring assets for the partnership. They made a proper election to amortize organization expenses over a 180 month period. Assuming these are their only expenses in starting their partnership, what is the proper amortization expense for 2010?
A. $1,000. 20. As of December 31, 2009, Doyle, Inc. had incurred $6,000 in potential market feasibility costs, $3,600 in legal fees for setting up the corporation, $2,400 in advertising costs for the opening of the business, and $18,000 for the purchase of equipment. Doyle, Inc. began business operations on January 1, 2010. If Doyle, Inc. chooses to amortize its organizational and start-up expenses over the minimum 180-month period, how much can Doyle, Inc. deduct as an amortization expense in 2010?
A. $800. 21. An election to amortize may be made for qualifying costs of organization for a partnership. Which of the following is not considered a qualifying cost?
A. A cost incurred in the creation of the partnership and not for
starting or operating the partnership trade or business. 22. Alan is a sole proprietor of the SAFE Auto Towing Company. Alan paid Landslide Land, Inc., (unrelated), $24,000 for the entire year 2010 for the use of the garage where he operates his business. On September 1, 2010, Alan signed a contract to purchase the garage. His rent payments from September through December will be applied to his equity interest in the business. What is the rent expense deduction that Alan may take on his Schedule C for 2010?
A. $24,000. 23. On January 1, 2010, Carrie leased property for her business for 5 years for $6,200 per year. Carrie paid the full $31,000 during the first year of the lease. What is Carrie's rental deduction for the year 2010?
A. $31,000. 24. Jeanne incurred start-up costs for her new business, which opened October 1, 2010. The costs were for advertising of $1,000, a market analysis survey of $2,500, employee training costs of $6,000, and travel costs for securing prospective distributions of $2,500. What part of the amortizable costs may be deducted in 2010?
A. Up to $5,000. 25. 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?
A. $ 0. 26. Ellie operates a restaurant business and Joyce works as a waitress only Monday through Friday from 7 a.m. to 4 p.m. Ellie provides Joyce with a free breakfast and lunch each day, including Saturday and Sunday. Ellie values the breakfast at $5 a day and lunch at $7 a day. Ellie includes the value in Joyce's wages. How much can Ellie deduct every week for meals provided to her employee?
A. $30. 27. You buy an interest in a partnership for $20,000 using borrowed funds. The partnership's only assets include machinery used in the business valued at $60,000 and stocks valued at $15,000. In 2010 you paid $2,000 interest on the loan. How much interest is deductible as interest attributed to a trade or business?
A. $2,000. 28. Rudy, a plumber, paid the following taxes: $800 on the purchase of a new truck, $1,500 for the current year's property tax, $150 sales tax on miscellaneous office supplies, $600 sales tax on merchandise he purchased for resale. How much can he deduct as a tax expense.
A. $150. 29. The Pine Corporation has just opened for business and has elected to amortize its startup expenses. What is the minimum number of months over which the start up costs can be amortized?
A. 60 Months. 30. The Adams & Baker Partnership bought James' B&B restaurant, which was located in an exclusive section of town. The goodwill associated with the purchase of this business was valued at $60,000. Per Section 179, what is the number of years over which goodwill can be amortized?
A. 5 years. 31. When an employer reimburses an employee for meals under an accountable plan while the employee is away from home, the employer must:
A. Include 50% of the cost of meals as income to the employee. 32. In determining whether you are carrying on an activity for profit, all the facts and circumstances are taken into account. All of the following are factors to consider except:
A. you are carrying on two different business activities. When you
combine the income and expenses together, you have a net profit. 33. Mark is an engineer for the Peterson LTD Partnership. Peterson has an accountable travel expense plan. Mark incurred $375 in travel expenses on a two-day business trip. When he returned to his tax home, he worked late and incurred $90 for meals. Mark gave his employer an adequate accounting within a reasonable time and did not have any excess reimbursement. What amount, if any, must be included in Mark's W-2?
A. $375. 34. Mark, a 50% partner in the X&Y Partnership, uses the percentage method to compute his depletion allowance for the gas and oil property owned by the partnership. His allocable share of the property is $100,000. The fair market value of the property is $100,000 also. 65% of his taxable income for 2010 equals $65,000. The percentage depletion rate is 15% for natural gas and oil sold. X&Y is a small producer, and the average daily production does not exceed the depletable oil and gas quantity. Mark's share of the gross sale of oil and gas deposits was $30,000. What is Mark's depletion deduction for 2010?
A. $4,500. 35. The J&M partnership paid liability insurance on its building of $2,200 for the year 2010. This represents a premium for one year. J&M also prepaid fire insurance premiums of $2,400. The premium paid was for 2010 and 2011. What is the amount of insurance that J&M may deduct for 2010?
A. $2,200. 36. In 2010, Mark paid his first quarter real estate taxes of $1,400 on his personal home. Mark paid real estate taxes on his unemployed brother-in-law's home of $800. During the year, Mark was assessed a tax for trash pick-up of $165. He also paid a tax of $250 for improvements made by the town in his development, which increased the value of his property. What is deductible on his Form 1040 for real estate taxes?
A. $1,440. 37. Which of the following costs qualify as business "start-up costs"?
A. Deductible interest. 38. Which of the following costs would qualify as business "organizational costs"?
A. State incorporation fees. 39. All of the following can be amortized as organizational expenditures for a newly formed corporation except:
A. Organizational meeting expenses of the corporate directors. 40. There is a difference between capital and deductible expenses. The following is a deductible expense.
A. Cost of a motor vehicle you use in your business.
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