Questions and Answers of Taxation of Business Entities

LO 2-5 Explain cost recovery of natural resources and the allowable depletion methods.
LO 2-4 Calculate the deduction for amortization.
LO 2-3 Calculate the deduction allowable under the additional special cost recovery rules (§179, bonus, and listed property).
LO 2-2 Determine the applicable cost recovery (depreciation) life, method, and convention for tangible personal and real property and the deduction allowable under basic MACRS.
LO 2-1 Describe the cost recovery methods for recovering the cost of personal property, real property, intangible assets, and natural resources.
83. Hank started a new business, Hank’s Donut World (HW for short), in June of last year. He has requested your advice on the following specific tax matters associated with HW’s first year of
82. Bryan followed in his father’s footsteps and entered the carpet business. He owns and operates I Do Carpet (IDC). Bryan prefers to install carpet only, but in order to earn additional revenue,
66. Suppose that David has elected to account for inventories and has adopted the last-in, first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below).In late
65. This year, Amber purchased a business that processes and packages landscape mulch.Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process.Costs
63. Binu teaches golf lessons at a country club under a business called Binu’s Pure Swings (BPS). Binu operates this business as a sole proprietorship on the accrual basis of accounting. Use the
58. In July of this year, Stephen started a proprietorship called ECR (which stands for electric car repair). ECR uses the cash method of accounting, and Stephen has produced the following financial
53. Heather is an attorney who paid $15,000 to join a country club in order to meet potential clients. This year she also paid $4,300 in greens fees when golfing with clients and paid an additional
45. Manny hired his brother’s firm to provide accounting services to his business. During the current year, Manny paid his brother’s firm $82,000 for services even though other firms were willing
44. What is a §481 adjustment, and what is the purpose of this adjustment?
43. Describe two specific accounting methods that are treated as initiated by the taxpayer without any need for consent of the IRS when the business qualifies under the gross receipts test.
42. Describe why the IRS might be skeptical of permitting requests for changes in accounting method without a good business purpose.
41. Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.
40. What are the relative advantages of the cash and accrual methods of accounting?
39. Describe the related-person limitation on accrued deductions. What tax savings strategy is this limitation designed to thwart?
38. Compare and contrast how bad debt expense is determined for financial accounting purposes and how the deduction for bad debts is determined for accrual-method taxpayers. How do cash-method
37. On December 31 of the current year, a taxpayer prepays an advertising company to provide advertising services for the next 10 months. Using the 12-month rule and the economic performance rules,
36. Describe when economic performance occurs for the following expenses:a) Workers’ compensationb) Rebates and refundsc) Insurance, warranties, and service contracts provided to the businessd)
35. Compare and contrast when taxpayers are allowed to deduct the cost of warranties provided by others to the taxpayer (i.e., purchased by the taxpayer) and when taxpayers are allowed to deduct the
34. Compare and contrast the tests for accruing income and those for accruing deductions for tax purposes.
33. Compare and contrast financial accounting rules with the tax rules under UNICAP (§263A). Explain whether the UNICAP rules tend to accelerate or defer income relative to the financial accounting
32. Describe why Congress enacted the UNICAP rules, and describe an exception to these rules.
31. Jack operates a large home repair business as a sole proprietorship. Besides providing services, Jack also sells home repair supplies to homeowners.However, these sales constitute a relatively
30. Compare and contrast the tax treatment for rental income received in advance with advance payments for goods and services.
29. Describe the all-events test for recognizing taxable income.
28. Fred is considering using the accrual method for his next business venture. Explain to Fred the conditions for recognizing income for tax purposes under the accrual method.
27. The cash method of accounting is generally preferred by taxpayers. Describe two types of businesses that are not allowed to use the cash method.
26. How do the requirements for accruing expenses under financial accounting differ from the requirements for accruing deductions under tax accounting?
25. Explain why Congress sometimes mandates that businesses use specific accounting methods while other times Congress is content to require businesses to use the same accounting methods for tax
24. Describe the 12-month rule for determining whether and to what extent businesses should capitalize or immediately deduct prepaid expenses such as insurance or security contracts. Explain the
23. Explain when an expenditure should be “capitalized” based upon accounting principles. From time to time, it is suggested that all business expenditures should be deducted when incurred for
22. How does an entity choose its tax year? Is it the same process no matter the type of tax year-end the taxpayer adopts?
21. Why does the law generally require partnerships to adopt a tax year consistent with the year used by the partners?
20. Compare and contrast the different year-ends available to sole proprietorships, flow-through entities, and C corporations.
19. Explain why a taxpayer might choose one tax year-end over another if given a choice.
18. What is the difference between a full year and a short year? Describe circumstances in which a business may have a short year.
17. How does a casualty loss on a business asset differ when the asset is stolen as opposed to destroyed in a fire?
16. Explain the difference between calculating a loss deduction for a business asset that was partially damaged in an accident and calculating a loss deduction for a business asset that was stolen or
15. Describe the gross receipts test and identify how this test relates to the business interest deduction.
14. Describe the computation of the limit placed on the business interest deduction. Is the disallowed business interest ever deductible?
11. What expenses are deductible when a taxpayer combines both business and personal activities on a trip? How do the rules for international travel differ from the rules for domestic travel?
10. Susmita purchased a car this year and uses it for both business and personal purposes. Susmita drove the car 11,000 miles on business trips and 9,000 miles for personal transportation. Describe
8. Jimmy is a sole proprietor of a small dry-cleaning business. This month Jimmy paid for his groceries by writing checks from the checking account dedicated to the dry-cleaning business. Why do you
7. Peggy is a rodeo clown, and this year she expended $1,000 on special “funny” clothes and outfits. Peggy would like to deduct the cost of these clothes as work-related because she refuses to
6. Provide an example of an expense associated with the production of tax-exempt income, and explain what might happen if Congress repealed the prohibition against deducting expenses incurred to
4. Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost
3. Whether a business expense is “reasonable in amount” is often a difficult question. Explain why determining reasonableness is difficult, and describe a circumstance where reasonableness is
2. Explain how cost of goods is treated when a business sells inventory.
LO 1-4 Apply cash and accrual methods to determine business income and expense deductions.
LO 1-3 Describe accounting periods available to businesses.
LO 1-2 Determine the limits on deducting business expenses.
LO 1-1 Identify common business deductions.
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He completed the last home on January 27 of this year.a)IDC finalized several other contracts this year and completed the work before year-end. The work cost $130,000 in materials, and IDC elects to
This year, Amber purchased a business that processes and packages landscape mulch.Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process.a) At the
Binu teaches golf lessons at a country club under a business called Binu’s Pure Swings (BPS). Binu operates this business as a sole proprietorship on the accrual basis of accounting. Use the
In July of this year, Stephen started a proprietorship called ECR (which stands for electric car repair). ECR uses the cash method of accounting, and Stephen has produced the following financial
Bryan followed in his father’s footsteps and entered the carpet business. He owns and operates I Do Carpet (IDC). Bryan prefers to install carpet only, but in order to earn additional revenue, he
Rex elects to use the deferral method to account for the transaction.c)Though the sci-fi figurines were not quite as popular, BAM sold 400 figurines at a sci-fi convention in April. Rex accepted cash
Rex loves to work with his hands and is very good at making small figurines. Three years ago, Rex opened Bronze Age Miniatures (BAM) for business as a sole proprietorship. BAM produces miniature
Jack, a geologist, had been debating for years whether or not to venture out on his own and operate his own business. He had developed a lot of solid relationships with clients, and he believed that
Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting, but he doesn’t keep any significant inventories
Erin is considering switching her business from the cash method to the accrual method at the beginning of next year. Determine the amount and timing of her §481 adjustment assuming the IRS grants
Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $5,000 of
Dustin has a contract to provide services to Dado Enterprises. In November of this year, Dustin billed Dado $10,000 for the services he rendered during the year. Dado is an accrual-method
BCS Corporation is a calendar-year, accrual-method taxpayer. BCS was formed and started its business activities on January 1 of this year. It reported the following information for the year. Indicate
Rebecca is a calendar-year taxpayer who operates a business. She made the following business-related expenditures in December of this year. Indicate the amount of these payments that she may deduct
Adam elects the accrual method of accounting for his business. What amount of deductions does Adam recognize this year for the following transactions?Adam guarantees that he will refund the cost of
Travis is a professional landscaper. He provides his clients with a one-year (12-month) warranty for retaining walls he installs. In June of this year, Travis installed a wall for an important
This year Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract requires Elizabeth to pay the consulting firm $1,500
Circuit Corporation (CC) is a calendar-year, accrual-method taxpayer. CC manufactures and sells electronic circuitry. On November 15 of this year, CC enters into a contract with Equip Corp (EC) that
Matt hired Apex Services to repair his business equipment. On November 1 of this year, Matt paid $2,000 for the repairs that he expects to begin in early March of next year.What amount of the cost of
On November 1 of this year, Jaxon borrowed$50,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of$4,500 relating to the 12-month period from November of
Suppose that David has elected to account for inventories and has adopted the last-in, first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below).Widget
Stephanie began her consulting business this year, and on April 1 Stephanie received a $9,000 payment for full payment on a three-year service contract (under the contract, Stephanie is obligated to
In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendaryear taxpayer who uses the cash method of
Brown Thumb Landscaping is a calendar-year, accrual-method taxpayer. In September, Brown Thumb negotiated a $14,000 contract for services it would provide to the city in November of the current year.
Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year.Indicate the extent to which these payments are
Nicole is a calendar-year taxpayer who accounts for her business using the cash method. On average, Nicole sends out bills for about $12,000 of her services on the first of each month. The bills are
This year, Amy purchased $2,000 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that
Renee operates a proprietorship selling collectibles over the Web. This year, Renee’s business reported revenue of $95.5 million and deducted $88.6 million in expenses and loss carryovers. Her
Red Inc. is a C corporation and a calendar-year taxpayer. Red reports sales of $26 million in 2020, $29.3 million in 2021, and $32 million in 2022.Is Reda) subject to the business interest limitation
Sarah is a cash-method, calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the after-tax cost of each payment assuming she is subject
Heather is an attorney who paid $15,000 to join a country club in order to meet potential clients. This year she also paid $4,300 in greens fees when golfing with clients and paid an additional
Haru is a self-employed cash-method, calendar-year taxpayer who made the following cash payments related to his business this year. Calculate the after-tax cost of each payment assuming Haru has a 37
Ryan is self-employed. This year Ryan used his personal auto for several long business trips. Ryan paid $1,500 for gasoline on these trips. His depreciation on the car if he was using it fully for
Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses: $250 fee to register for the conference,
Armelio operates a business that acts as a sales representative for a client that produces and sells precious metals to electronics manufacturers.Armelio contacts manufacturers and convinces them to
Indicate the amount (if any) that Josh can deduct as an ordinary and necessary business deduction in each of the following situations and explain your solution.Josh borrowed $50,000 from First State
Michelle operates several food trucks. Indicate the amount (if any) that she can deduct as an ordinary and necessary business deduction in each of the following situations and explain your
What is a §481 adjustment, and what is the purpose of this adjustment?
Describe when economic performance occurs for the following expenses:a) Workers’ compensationb) Rebates and refundsc) Insurance, warranties, and service contracts provided to the businessd) Taxes
Describe why Congress enacted the UNICAP rules, and describe an exception to these rules.
Jack operates a large home repair business as a sole proprietorship. Besides providing services, Jack also sells home repair supplies to homeowners.However, these sales constitute a relatively small
Compare and contrast the tax treatment for rental income received in advance with advance payments for goods and services.
Describe the all-events test for recognizing taxable income.

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