Chapter 3: Business Income and Expenses, Part I Key
1. The cost of transportation from New York to London for a trip that is for both business and pleasure may be
deducted in full as a travel expense.
2. If an employee is transferred to a distant location for an indefinite period of time, the new location typically
will be considered the employee’s new tax home.
3. There is a limitation of $25 per donee on the deduction of gifts to employees for length of service.
4. The expense of travel as a form of education is not deductible.
5. A business gift with a value of $35 presented to a client and his nonclient spouse is fully deductible by the
donor.
6. The standard mileage rate for automobiles for the first half of 2011 is 51 cents per mile.
7. For an expense to qualify as a travel expense, the taxpayer must be away from home for at least 24 hours.
8. The home office deduction is an easy way for a taxpayer to show a loss on his or her tax return.
9. If a taxpayer takes a trip within the United States which is primarily for business, the cost of travel to and
from the destination need not be prorated between the business and personal portion of the trip.
10. If the taxpayer does not maintain adequate records of the car expenses (i.e., gas, tires, car insurance, etc.),
11. The cost of a subscription to the New England Journal of Medicine is a deductible expense for a hospital
intern.
12. The cost of a blue wool suit for an accountant is a deductible expense.
13. The expense of a sales luncheon may be deductible (50 percent in 2011) even if no sale is made.
14. A gift to a foreman by a worker is considered business related and therefore subject to the $25 limit.
15. If a home office is used for both business and personal purposes, the home office expenses, such as rent or
depreciation, should be allocated between the business and personal use and then deducted.
16. If a taxpayer works at two or more jobs during the same day, he or she may deduct the cost of transportation
from one job to the other.
17. Taxpayers who use their country club more than 50 percent for business may deduct the total amount of
their membership dues.
18. Once a taxpayer uses the standard mileage method to determine the deduction for automobile expenses for
the tax year, the standard mileage method must be used in all subsequent years.
19. The IRS has approved only two per diem methods to substantiate travel expenses, the high-low method and
the meals and incidental expenses method.
20. Schedule C or Schedule C-EZ may be used to report the net profit or loss from a partnership with business
expenses of $2,500 or less.
21. A deduction for a business bad debt is allowed only to the extent that income related to the debt was
previously included in taxable income.
22. A taxpayer who adopts the LIFO method of inventory valuation for tax purposes may use the FIFO method
for preparing financial statements.
23. The taxpayer must use either the FIFO or LIFO method of valuing inventory, depending upon which
method reflects the actual goods the taxpayer has on hand.
24. Once the election to use the LIFO inventory method has been made by a taxpayer, the inventory method
may be changed only with the consent of the IRS.
25. Most taxpayers must use the specific charge-off method in calculating the bad debt deduction.
26. When a taxpayer uses the FIFO inventory valuation method, the assumption on which the method is based is
that the inventory on hand at the end of the year consists of the most recently acquired items.
27. Under the specific charge-off method, a deduction for a bad debt is taken when the debt is determined to be
worthless.
28. Net operating losses may be carried forward indefinitely.
29. During 2011, Harry, a self-employed accountant, travels from Kansas City to Miami for a 1-week business
trip. While in Miami, Harry decides to stay for an additional 5 days of vacation. Harry pays $600 for airfare,
$200 for meals, and $500 for lodging while on business. The cost of meals and lodging while on vacation was
$300 and $500, respectively. How much may Harry deduct as travel expenses for the trip?
A. $600
30. Which of the following items incurred while on travel is not considered a travel expense?
31. During the 2011 holiday season, Bob, a barber, gave business gifts to 34 customers. The values of the gifts,
which were not of a promotional nature, were as follows:
8 at $10 each
8 at $25 each
8 at $50 each
10 at $100 each
For 2011, what is the amount of Bob’s business gift deduction?
32. Which of the following expenses, incurred while on travel, does not qualify as a travel expense?
33. If a per diem method is not used, which of the following items is not required as substantiation for the
deduction of a travel expense?
34. Which of the following is deductible as dues, subscriptions or publications?
35. Barry is a self-employed attorney who travels to New York on a business trip during 2011. Barry’s expenses
were as follows:
Airfare
$560
Taxis
40
Meals
100
Lodging
350
How much may Barry deduct as travel expenses for the trip?
A. $0
36. Linda is self-employed and spends $600 for business meals and $400 for business entertainment in 2011.
What is Linda allowed to deduct in 2011 for these expenses?
37. Nancy owns a small dress store. During 2011, Nancy gives business gifts having the indicated cost to the
following individuals:
Mrs. Johns (a customer)
$37 plus $3 shipping
Mr. Johns (nonclient husband of Mrs. Johns)
$10
Ms. Brown (a customer)
$22
What is the amount of Nancy’s deduction for business gifts?
38. Richard operates a hair styling boutique out of his home. 300 of the 1,200 square feet of floor space are
allocated to the boutique. Other information is as follows:
Gross income from the boutique
$10,000
Supplies for the boutique
2,000
Depreciation on total residence
12,000
Utilities for total residence
6,000
What amount of income or loss from the boutique should Richard show on his return?
39. Peter operates a dental office in his home. The office occupies 250 square feet of his residence, which is a
40. If an employer chooses a per diem method of substantiation for travel expenses,
41. To file a Schedule C-EZ, the taxpayer must:
42. Which of the following taxpayers may not use the standard mileage method of calculating transportation
costs?
43. Taxpayers who make a combined business and pleasure trip:
44. Choose the correct answer.
45. To be deductible as the cost of special work clothing or uniforms:
46. Gary is a self-employed accountant who pays $2,000 for business meals. How much of a deduction can he
claim for the meals and where should the deduction be claimed?
48. What income tax form does a self-employed sole proprietor usually use to report income and expense from
business?
49. Kendra is a self-employed taxpayer working exclusively from her home office. Before the home office
deduction, Kendra has $5,000 of net income. Her allocable home expenses are $10,000 in total. How are the
home office expenses treated on her current year tax return?
50. Mikey is a self-employed computer game software designer. He takes a week-long trip to Maui, primarily
for business. He takes 2 personal days at the beach. How should he treat the expenses related to this trip?
51. In the current year, Johnice started a profitable bookkeeping business as a sole proprietor. Johnice made
$38,000 in her first year of operation. What two forms must Johnice file for her business?
52. Which of the following factors are considered by the IRS in evaluating whether an activity is classified as a
business or a hobby?
53. In determining whether an activity should be classified as a hobby, the tax law provides a rebuttable
presumption with regard to the profits or losses of an activity. Which of the following statements describes the
profit/loss test which must be satisfied in order to meet the presumption that the activity is not a hobby?
54. Carlos drives to Oregon to consult with a client. He works for 1 day and spends 3 days enjoying Oregon
since the consultation was right before a 3-day weekend. His expenses were $175 to drive to Oregon and back,
$600 for lodging, $45 for food on the day that he worked, and $125 for food on the other 3 days. How much of
his travel expenses are deductible?
A. $945.00
55. Gene is a self-employed taxpayer working from his home. His net income is $7,000 before home office
expenses. His allocable home office expenses are $8,000 in total. How are the home office expenses treated
on his current year tax return?
56. Bobby is an accountant who uses a portion of his home as his office. His home is 2,500 square feet and his
office space occupies 1,000 square feet. Rent expense is $20,000 a year; utilities expense is $1,200 a year; and
maintenance expense is $2,000 a year. What is the total amount of these expenses that can be allocated to his
business?
57. Jack is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in
meals, and $2,000 in green fees to entertain clients. He is also a member of the local Rotary club where he
meets potential clients. The dues for the Rotary club are $1,200 a year. How much of the above expenses can
Jack deduct as business expenses?
58. Which of the following does not give rise to a business expense for uniforms or special clothing?
59. Sue is a small business owner who often gives gifts to clients. She gives a $40 gift to her client, Mr. Smith,
and his wife. Sue spent $6 to wrap the gift. She also gave out 400 calendars with her company name on
them. Each calendar cost $1. Sue also gave her secretary a $370 watch for his 10 years of service. How much
of the above expenses may she deduct?
A. $816
60. Maria runs a small business out of her home. She has expenses of $2,000 per year and uses the cash basis
method of accounting. Her only employee is her cousin who works for her part-time. What form should she
use to report her business income?
61. In his spare time, Fred likes to restore old furniture and sell it to his friends. He is a lawyer by
trade. During 2011, he sells $500 worth of furniture and has $21,000 worth of expenses. Which one of the
following is true?
A. Fred may deduct all $21,000 of his expenses because Fred is engaged in a hobby.
62. Deductible transportation expenses:
A. Include meals and lodging
63. Acacia Company had inventory of $100,000 on December 31, 2011. Other information is as follows:
Purchases $ 1,500,000
Sales 3,000,000
Inventory 1/1/2011 300,000
What is the amount of Acacia’s cost of goods sold for 2011?
64. Splashy Fish Store allows qualified customers to purchase items on credit. During 2011, Lisa, the owner of
the store, determines that $3,500 of accounts receivable are not collectible. Which of the following statements
is true with respect to Lisa’s deduction for the uncollectible accounts receivable?
E. Two of the above statements are true
65. Jasper owns a small retail store as a sole proprietor. The business records show that the cost of the store’s
inventory items has been steadily increasing. The cost of the end of the year inventory is $200,000 and the cost
of the beginning of the year inventory was $250,000. Jasper uses the FIFO method of inventory
valuation. Which of the following statements is true?
A. Jasper purchased more inventory during the year than he sold during the same one-year period.
66. The net operating loss (NOL) provisions of the Internal Revenue Code
A. Apply only to individuals with wages, itemized deductions, and personal exemptions.
67. Tim loaned a friend $4,000 to buy a used car. In the current year, Tim’s friend declares bankruptcy and the
debt is considered totally worthless. What amount may Tim deduct on his individual income tax return for the
current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?
68. Karen has a net operating loss in 2011. If she does not make any special elections, what is the first year to
which Karen can carry the net operating loss?