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Deductibility of Business Expenses

1. Christopher is a cash-method, calendar-year taxpayer, and he made the following cash payments related to his business this year. Next to each item, indicate the amount that would be deductible on his current years tax return.

2. $800 of interest on a short-term loan that was paid off before the end of the year. Half of the loan

   1. proceeds were used to invest in municipal bonds

      ______________

   2. $300 fine for speeding while traveling to a client meeting

      ______________

   3. $1,500 for office supplies. He used half the supplies this year and will use the remaining half by February of next year

      ______________

   4. $2,400 for an insurance policy effective for three years beginning this April 1. ______________

3. Jack, a geologist, opened a business organized as a C corporation called Geo-Jack (GJ) in January of this year. Jack is the sole shareholder. Assume GJ reports on a calendar year and uses the accrual method of accounting. For each item below, indicate its effect on Jacks taxable income and you must clearly indicate whether it is positive or negative.

   1. In January, GJ rented a small business office about 12 miles from Jacks home. GJ paid $14,000, which represented a damage deposit of $6,000 plus rent for two years ($4,000 annually).

      ______________

   2. GJ earned and collected $300,000 performing geological-related services and selling its specialized digging tool.

      ______________

   3. GJ purchased some new equipment in February for $53,700. It claimed depreciation on these assets during the year in the amount of $4,510.

      ______________

   4. GJ paid Jacks father $12,000 for services that would have cost no more than $7,000 if Jack had hired any other local business to perform the services. While Jacks dad was competent, he does not command such a premium from his other clients.

      ______________

   5. In an attempt to get his name and new business recognized, GJ paid $9,000 for a one-page ad in the Geologic Survey. It also paid $11,000 in radio ads to be run through the end of December.

______________

6. In November, GJs office was broken into and equipment valued at $6,000 was stolen. The tax basis of the equipment was $6,500. GJ received $4,000 of insurance proceeds from the theft.

   ______________

7. GJ incurred a $5,000 fine from the state government for digging in an unauthorized digging zone.

   ______________

8. GJ reimbursed employee-salespersons $4,200 for meals involving substantial business discussion.

   ______________

3. Danny owns an electronics outlet in Dallas. This year he paid $400 to register for a four-day management conference in Chicago. After the course, Danny spent an additional day in Chicago sightseeing. Danny paid $1,200 in airfare and $900 for five nights lodging. During the trip, Danny also paid $200 a day for meals and $75 in cab fare for transportation to/from the conference hotel and the airport. What amount of these travel-related expenditures may Danny deduct as business expenses?

Business Interest Deduction Limitation

4. Rock Island Corporation generated taxable income of $1 million this year. Taxable income was computed on $50 million of revenues and included $50,000 of interest income, $150,000 of interest expense, and $80,000 of depreciation. What is Rock Island's maximum business interest deduction for the year?

5. Suppose instead that Rock Island Corporation generated taxable income of $600,000 this year. Taxable income was computed on $50 million of revenues and included $30,000 of interest income, $500,000 of interest expense, and $80,000 of depreciation. What would Rock Island's actual interest deduction be for the year?

Change in Accounting Method

6. Erin is considering switching her business from the cash method to the accrual method at the beginning of next year (year 1). At the end of year 0/beginning of year 1, Erin's business has $22,300 of accounts receivable and $15,400 of accounts payable that have not been recorded for tax purposes. What would be the amount of her 481 adjustment assuming the IRS grants Erin's request to change accounting methods? ___________ Increase or Decrease net income (must circle one)

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