Activity based questions

26.Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the

employee?

a) Health insurance with benefits payable to the employee.

b) Whole life insurance with benefits payable to the employee's dependents.

c) Group term life insurance with benefits payable to the employee's dependents.

d) key man life insurance with benefits payable to Dick.

e) All of these are deductible by Dick.

27.Which of the following cannot be selected as a valid tax year end?

a) December 31st

b) January 31st

c) The last Friday of the last week of June

d) December 15th

e) A tax year can end on any of these days.

28.Joe is a self employed electrician who operates his business on the accrual method. This year, Joe purchased a shop for his

business and at year end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year end.

Which of the following is a true statement?

a) If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year.

b) The taxes are a payment liability.

c) The taxes would not be deductible if Joe's business was on the cash method.

d) Unless Joe makes an election, the taxes are not deductible this year.

e) All of these are true.

29.Bill operates a proprietorship using the cash method of accounting, and this year he received the following payments:

• $100 in cash from a customer for services rendered this year

• a promise to pay $200 from a customer for services rendered this year

• tickets to a football game worth $250 as payment for services performed last year

• a check for $170 for services rendered this year that Bill forgot to cash

How much income should Bill realize on Schedule C?

a) $100

b) $300

c) $350

d) $270

e) $520

30.Which of the following is a true statement about a request for a change in accounting method?

a) Some requests are automatically granted.

b) Most requests require the permission of the Commissioner.

c) Many requests require payment of a fee and a good business purpose for the change.

d) Form 3115 is required to be filed with a request for change in accounting method.

e) All of these are true.

31.Which of the following expenses are completely deductible?

a) $1,000 spent on compensating your brother for a personal expense.

b) $50 spent on meals while traveling on business.

c) $2,000 spent by the employer on reimbursing an employee for entertainment.

d) All of these expenses are fully deductible.

e) None of these expenses can be deducted in full.

32.Which of the following business expense deductions is most likely to be unreasonable in amount?

a) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees.

b) Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by

competing corporations.

c) Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client.

d) None of these is likely to be unreasonable in amount.

e) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees, amounts paid to a subsidiary

corporation for services where the amount is in excess of the cost of comparable services by competing corporations, and cost of

entertaining a former client when there is no possibility of any future benefits from a relation with that client are all likely to be

considered unreasonable in amount.

33.The domestic manufacturing deduction is a deduction for the incremental cost of manufacturing tangible assets in the United

States.

• True

• False

34.Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

True

False

35.All taxpayers must account for taxable income using a calendar year.

• True

• False

36.The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.

True

False

37.The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct

of a business.

True

False

38.Illegal bribes and kickbacks are not deductible as business expenses, but this prohibition does not include fines incurred in the

ordinary course of business.

• True

• False

39.Qualified production activity income for calculating the domestic manufacturing deduction is limited to taxable income for a

business or modified AGI for an individual.

True

False

40.A business generally adopts a fiscal or calendar year by using that year end on the first tax return for the business.

True

False

41.The domestic manufacturing deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic

manufacturing activities during the year.

True

False

42.Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.

True

False

43.A fiscal tax year can end on the last day of any month other than December.

True

False

44.Uniform capitalization of indirect inventory costs is required for most large taxpayers.

True

False

45.The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

True

False

46.The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary".

• True

• False

47.Sole proprietorships must use the same tax year as the proprietor of the business.

True

False

48.The all-events test for income determines the period in which income will be recognized for tax purposes.

True

False

49.The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

True

False

50.When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt

will not be deductible.

True

False

51.Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

True

False

52.Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

True

False

53.The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary".

True

False

54.The domestic manufacturing deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic

manufacturing activities during the year.

• True

• False