29 Jun Question 1.Individual proprietors report their business income and
Question
1.Individual proprietors report their business income and deductions on:
Form 1065
Form 1120S
Schedule C
Schedule A
Form 1041
2.According to the Internal Revenue Code §162, deductible business expenses must be one of the following?
incurred for the production of investment income
ordinary and necessary
minimized
appropriate and measurable
personal and justifiable
3.Which of the following is NOT likely to be allowed as a current deduction for a landscaping and nursery business?
cost of fertilizer
accounting fees
cost of a greenhouse
cost of uniforms for employees
a cash settlement for trade name infringement
4.The IRS would most likely apply the arm’s length transaction test to determine which of the following?
whether an expenditure is related to a business activity
whether an expenditure will be likely to produce income
timeliness of an expenditure
reasonableness of an expenditure
All of these
5.Which of the following business expense deductions is most likely to be unreasonable in amount?
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.
Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client.
None of these is likely to be unreasonable in amount.
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.
6.Which of the following is a true statement?
Interest expense is not deductible if the loan is used to purchase municipal bonds.
Insurance premiums are not deductible if paid for “key man” life insurance.
One half of the cost of business meals is not deductible.
All of these are true.
None of these is true.
7.Which of the following expenditures is most likely to be deductible for a construction business?
A fine for a zoning violation.
A tax underpayment penalty.
An “under the table” payment to a government representative to obtain a better price for raw materials.
A payment to a foreign official to expedite an application for a business permit.
An arm’s length payment to a related party for emergency repairs of a sewage line.
8.Which of the following is an explanation for why insurance premiums on a key employee are not deductible?
The insurance deduction would offset taxable income without the potential for the proceeds generating taxable incom0065.
The federal government does not want to subsidize insurance companies.
It is impractical to trace insurance premiums to the receipt of proceeds.
Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code.
This rule was grandfathered from a time when the IRC disallowed all insurance premiums deductions.
9.Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures?
$1,000 dinner with a film producer where no business was discussed
$500 lunch with sister Nicky where no business was discussed
$700 business dinner with a client but Paris forgot to keep any records (oops!)
$900 tickets to the opera with a client following a business meeting
$450
$900
$1,100
$1,200
$800
10.Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?
Health insurance with benefits payable to the employee.
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