1. 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.
B. $2,000.
C. $2,400.
D. $6,000.

2. 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.
B. Accounting fees for services incident to the organization or the partnership.
C. Legal fees for preparation of the partnership agreement.
D. The costs of acquiring assets for the partnership.

3. 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.
B. $ 0.
C. $8,000.
D. $16,000.

4. 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.
B. $6,200.
C. $15,500.
D. $24,800.

5. 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.
B. Up to $10,000.
C. Either A or B above.
D. $200.

6. 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.
B. $10,000.
C. $20,000.
D. $30,000.

7. 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.       
B. $84.
C. $60.
D. $24.

8. 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.
B. $400.
C. $1,600.
D. $0.

9. 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.
B. $3,050.
C. $2,250.
D. $1,500.

10. 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.
B. 80 Months.
C. 6 Months.
D. 180 Months.

11. 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.
B. 10 years.
C. 15 years.
D. 20 years.

12. 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.
B. Do nothing.
C. Deduct only 50% of the reimbursement on his/her tax return.
D. Add 100% of the meals as income to the employee.

13. 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.
B. Your losses are due to circumstances beyond your control.
C. You can expect to make a future profit from the appreciation of the assets used in the activity.
D. You were successful in making a profit in similar activities in the past.

14. 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.
B. $465.
C. $0.
D. $90.

15. 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.
B. $9,750.
C. $9,000.
D. $5,250.

16. 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.
B. $3,400.
C. $4,600.
D. $2,400.

17. 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.
B. $1,400.
C. $8,800.
D. $1,040.

18. Which of the following costs qualify as business "start-up costs"?

A. Deductible interest.
B. State and local taxes.
C. A survey of potential markets.
D. Research and experimental costs.

19. Which of the following costs would qualify as business "organizational costs"?

A. State incorporation fees.
B. State and local taxes.
C. Deductible interest.
D. All of the above would qualify as organizational costs.

20. All of the following can be amortized as organizational expenditures for a newly formed corporation except:

A. Organizational meeting expenses of the corporate directors.
B. Organizational meeting expenses of stockholders.
C. Fees paid to attorney for legal expenses in conjunction with creation of corporation.
D. Commissions to investment banker for initial public offering of stock.

21. 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.
B. The cost of building a private road on your business property and the cost of replacing a gravel driveway.
C. Amounts spent for tools used in your business if the tools have a life expectancy of less than 1 year.
D. The cost of changing from one heating system to another.

22. To be deductible, your employee's pay must be an ordinary and necessary expense and you must pay or incur it. The pay must be

A. Reasonable.
B. For services performed.
C. Pay figured using acceptable pay methods. 
D. Both A and B above.

23. When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenses. Generally,

A. You can recover the costs for particular assets through depreciation, amortization or depletion deductions.
B. You cannot recover other costs until you sell the business.
C. You cannot recover other costs until you go out of business.
D. None of the above.

24. These are the costs of carrying on a trade or business and they are usually deductible if the business is operated to make a profit.

A. Business assets.
B. Improvements.
C. Business expenses.
D. All of the above.

25. If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. To qualify to claim expenses for the business use of your home,

A. The business part of your home must be used exclusively and regularly for the trade or business.
B. The business part of your home must be your principal place of business or a place where you meet with or deal with patients, clients, or customers in the normal course of your trade or business.
C. The business part of your home must be a separate structure (not attached to your home) used in connection with your trade or business.
D. All of the above.

26. To be deductible, a business expense is helpful and appropriate for your business. It is an expense that is common and accepted in your field of business and it does not have to be indispensable to be considered necessary. To be deductible the business expense must be

A. Ordinary and necessary.
B. An indispensable expense.
C. An expense that is absolutely necessary.
D. A capital expense.

27. When you can deduct an expense depends on your accounting method. An accounting method is a set of rules used to determine when and how income and expenses are reported. The method you use must clearly reflect income. The two basic methods are 

A. The ordinary method and the necessary method.
B. The cash method and the accrual method.
C. The expense method and the absolute method.
D. The business method and the personal method.

28. You generally can deduct premiums you pay for insurance related to your trade or business. One kind of insurance is life insurance covering your officers and employees. You can deduct as business expenses life insurance covering your officers and employees if

A. You pay for the plan for the whole tax year.
B. You are not directly or indirectly a beneficiary under the contract.
C. You also are a beneficiary under the contract.
D. If the life insurance also covers your car.

29. Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. These costs

A. Should be included in the basis of property you produce or acquire for resale.
B. Should be claimed as a current deduction.
C. Are produced for your personal use and are not business costs.
D. Both A and B above.

30. You are able to deduct the following expense as cost of goods sold from your gross receipts on Schedule C.

A. Factory overhead.
B. Storage and direct labor for workers who produce the products.
C. Costs of products or raw materials, including freight.
D. All of the above.

31. This debt is a loss from the worthlessness of a debt that was either created or acquired in your trade or business, or was closely related to your trade or business when it became partly or totally worthless.

A. A non-business bad debt.
B. A business bad debt.
C. A personally motivated bad debt.
D. An investment bad debt.

32. An accountable plan, requires your employees

A. To have paid or incurred deductible expenses while performing services as your employee.
B. To have adequately account to employer for deductible expenses within a reasonable period of time.
C. To return any excess reimbursement or allowance within a reasonable period of time.
D. All of the above.

33. You employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. For 2010, the standard mileage rate for each business mile is

A. 50.5 cents per mile for the period January 1 through June 30, 2010.
B. 58.5 cents per mile the period July 1, through December 31, 2010.
C. 50 cents per mile for all business miles.
D. Both A and B above.

34. To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Generally, you also must show that they are

A. Directly related to or associated with the conduct of your trade or business.
B. Indispensable to your business.
C. The most inexpensive expense possible.
D. All of the above.

35. You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in taxes from your own funds. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as

A. Expenses for going into business.
B. Factory rent.
C. Taxes.
D. All of the above.

36.  As an employer you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. Deduct these payments as

A. Employee fringe benefits.
B. Taxes paid.
C. Organization costs.
D. All of the above.

37. If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are

A. Contingent on productivity, use, or disposition of the item.
B. Payable at least annually for the entire term of the transfer agreement.
C. Substantially equal in amount (or payable under a fixed formula).
D. All of the above.

38. The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. The cost of repairs includes the costs of labor, supplies, and certain other items. An example of a repair would be

A. Reconditioning floors (but not replacement).
B. Repainting the interior and exterior walls of a building.
C. Fixing plumbing leaks (but not replacement of fixtures).
D. Any of the above.

39. Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the year. If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if

A. You do not keep a record of when they are used.
B. You do not take an inventory of the amount on hand at the beginning and end of the year.
C. This method does not distort your income.
D. All of the above.

40. The cost of making improvements to a business asset are capital expenses if the improvements

A. Add to the value of the asset.
B. Appreciably lengthen the time you can use it.
C. Adapt it to a different use.
D. Any of the above.

1. Under the general rule, all of the following require you to capitalize rental expenses EXCEPT?

A. You produce real or tangible personal property for sale to customers.
B. You produce real or tangible personal property for use in a trade or business or activity engaged in for profit.
C. Your rent increases during the lease.
D. You acquire property for resale and your average annual gross receipts are greater than $10,000,000.

2. All of the following qualify for the depletion deduction EXCEPT:

A. Oil and gas.
B. Timber.
C. Land.
D. Geothermal deposits.

3. Jennifer Jones, an attorney, made loans of $5,000 and $2,000 to two of her clients in order to keep their business. She also made a loan of $1,000 to her cousin John to whom she had provided free legal advice regarding the start of his own business. If all three loans become uncollectible, what amount may Jennifer deduct as a business bad debt?

A. $8,000.
B. $1,000.
C. $7,000.
D. $2,000.

4. Which of the following statements regarding deductible taxes is correct?

1. Local benefit taxes for business assets are deductible only if they are for maintenance, repair, or interest charges related to those benefits.
2. If you use an accrual method, you generally cannot accrue real state taxes until you pay them to the government authority.
3. Taxes on gasoline, diesel fuel and other motor fuels that you use in your business should be deducted as part of the cost of the fuel.
4. Any tax imposed by a state or local government on personal property used in your trade or business is deductible.

A. 1, 2 and 4.
B. 2 and 4.
C. 1 and 3.
D. 1, 2, 3 and 4 (All of the above).

5. Regarding "other" business expenses, all of the following statements are correct EXCEPT:

A. You may never deduct your own education expenses.
B. Penalties you pay for late performance or nonperformance of a contract are generally deductible.
C. Legal fees paid to acquire a new office building must be added to the basis of the building and recovered through depreciation.
D. The cost of a license granted by a governmental unit or agency including issuances and renewals is a deductible business expense.

6. In determining whether an activity is engaged in for profit, the relevant facts and circumstances are taken into account. All of the following may indicate you are carrying on the activity for profit EXCEPT:

A. You carry on the activity in a businesslike manner.
B. You depend on income from the activity for your livelihood.
C. You can expect to make a future profit from the appreciation of assets used in the activity.
D. Despite your lack of profitability, you continue to use the same methods of operation to prove that you are serious and the activity is not just a hobby.

7. In 2009, Katie Good, a sole proprietor of Good's Bike Shop, had gross income of $235,000, a bad debt deduction of $7,000 and other expenses of $65,850. She reported the business on the accrual method of accounting and used the specific charge-off method for bad debts. In 2010, she recovered $5,000 of the $7,000 bad debt deducted in 2009. How much will she claim in income and in what year?

A. $7,000 in 2010.
B. Amend 2009 to eliminate bad debt deduction of $7,000.
C. $5,000 in 2010.
D. Amend 2009 to reduce bad debt deduction by $5,000.

8. On June 30, 2010, Cindy, who uses the cash method of accounting, borrowed $30,000 from a bank to use in her business. Cindy was to repay the loan in one payment with $2,000 interest due on December 30, 2010. On December 30, 2010. The new loan was for $32,000 (the original unpaid loan and unpaid interest). How much can Cindy deduct as interest expense for 2010?

A. $2,000.
B. $1,000.
C. $0.
D. $500.

9. During 2010, Mr. Smith had the following expenditures relating to commercial real estate that she owns:

What is the amount Ms. Smith may deduct as real estate taxes on her commercial real estate for 2009?

A. $2,955.
B. $4,455.
C. $3,765.
D. $5,265.

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.
B. $4,250.
C. $4,000.
D. $10,000.

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.
B. Meals furnished to your employees as part of the expense of a company picnic.
C. Meals furnished to your employees at your place of business when more than half of these employees are provided the meals for your convenience.
D. Meals furnished to an employee that are not included in his wages.

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.
B. Mines and Geothermal deposits.
C. Geothermal deposits.
D. Timber.

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.
B. $30,000.
C. $6,000.
D. $12,000.

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.
B. Report $4,500 as "Other Income" on return from 1040 line 21 in 2010.
C. Report $4,500 as "Other Income" on an amended 2009 Form 1040X return.
D. Report $4,500 as a reduction of "Bad Debt" 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.
B. $59,585.
C. $69,585.
D. $53,585.

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.
B. $200,000.
C. $275,000.
D. $102,000.

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.
B. Deduct $3,000 and amortize the remaining $49,000 over 180 months.
C. Deduct $5,000 and amortize the remaining $47,000 over 180 months.
D. Deduct $18,000 and amortize the remaining $32,000 over 180 months.

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).
B. $(1,500).
C. $(1,000).
D. $(0).

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.
B. $600.
C. $233.
D. $1,200.

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Revised: 05/12/12