South-Western Federal Taxation 2020 Essentials of Taxation Individuals and Business Entities, 23rd Edition by Annette Nellen - Test Bank

South-Western Federal Taxation 2020 Essentials of Taxation Individuals and Business Entities, 23rd Edition by Annette Nellen – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

True / False
1. The Code does not specifically define what constitutes a trade or business.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 1:59 PM
DATE MODIFIED: 3/11/2019 4:04 PM
2. An expense need not be recurring in order to be “ordinary.”
a. True
b. False
ANSWER: True
RATIONALE: An expense is ordinary if it is normal, usual, or customary in the type of business
conducted by the taxpayer and is not capital in nature. However, the expense need
not be recurring to be deductible as ordinary.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:04 PMCopyright Cengage Learning. Powered by Cognero. Page 1Chapter 05: Business Deductions
3. Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary. The IRS classifies $100,000 of this
amount as unreasonable compensation. The effect of this reclassification is to decrease Aaron’s gross income by
$100,000 and increase Pigeon’s gross income by $100,000.
a. True
b. False
ANSWER: False
RATIONALE: While Aaron’s dividend income increases by $100,000, his salary income decreases
by $100,000. Thus, his gross income does not change. Pigeon’s gross income does
increase by $100,000. (Pigeon’s deductions decrease by $100,000 as dividend
payments are not deductible by a corporation which causes Pigeon’s taxable income
to increase by $100,000).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:04 PM
4. The portion of a shareholder-employee’s salary that is classified as unreasonable has no effect on the amount of the
shareholder-employee’s gross income but results in an increase in the taxable income of the corporation.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:04 PMCopyright Cengage Learning. Powered by Cognero. Page 2Chapter 05: Business Deductions
5. Generally, a closely held family corporation is not permitted to take a deduction for a salary paid to a family member
in calculating corporate taxable income.
a. True
b. False
ANSWER: False
RATIONALE: Only unreasonable salaries are not deductible.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:04 PM
6. The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant
income-producing factor in the business.
a. True
b. False
ANSWER: False
RATIONALE: The accrual method must be used in these cases unless the gross receipts test is
met.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:04 PMCopyright Cengage Learning. Powered by Cognero. Page 3Chapter 05: Business Deductions
7. A taxpayer’s note or promise to pay satisfies the “actually paid” requirement for the cash basis method of
accounting.
a. True
b. False
ANSWER: False
RATIONALE: Promising to pay or issuing a note does not satisfy the actually paid requirement.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:04 PM
8. Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the
other.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 4Chapter 05: Business Deductions
9. Under the 12-month rule for the current-period deduction of prepaid expenses of cash basis taxpayers, the asset
must expire or be consumed by the end of the tax year following the year of payment.
a. True
b. False
ANSWER: True
RATIONALE: If the one-year rule is not satisfied, the prepayment is prorated and deducted over
the benefit period.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
10. None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is
deductible in the current period.
a. True
b. False
ANSWER: False
RATIONALE: The amount paid for the 18-month period is not all deductible in the current tax year
because the prepayment period extends substantially beyond the end of the tax year
following the year of payment (i.e., must be capitalized). However, that portion of
the prepaid rent that relates to September through December of the current tax year
may be deducted in the current tax year.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 5Chapter 05: Business Deductions
11. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic
performance and all events tests.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
12. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for
tax purposes but is not allowed for a cash method taxpayer.
a. True
b. False
ANSWER: False
RATIONALE: A reserve for estimated expenses (e.g., bad debt) is not allowed to an accrual
method taxpayer for tax purposes because the economic performance test cannot be
satisfied. For a cash method taxpayer, there is no addition to the reserve for bad
debts because income that would have generated a debt has not been recognized.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 6Chapter 05: Business Deductions
13. All domestic bribes (i.e., to a U.S. official) are disallowed as deductions.
a. True
b. False
ANSWER: True
RATIONALE: However, a payment to a foreign official is deductible if it is not in violation of the
Foreign Corrupt Practices Act of 1977.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
14. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they
relate to a trade or business.
a. True
b. False
ANSWER: False
RATIONALE: Fines and penalties paid for violations of laws are never deductible.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 7Chapter 05: Business Deductions
15. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 “grease” payment to a
U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a
Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan’s
employer.
a. True
b. False
ANSWER: False
RATIONALE: The payment to the U.S. official is not deductible. However, unless the payment is
illegal under the Foreign Corrupt Practices Act of 1977, the payment to the Saudi
official can be deducted.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
16. Two-thirds of treble damage payments under the antitrust law are not deductible.
a. True
b. False
ANSWER: True
RATIONALE: Only one-third of such payments is deductible.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 8Chapter 05: Business Deductions
17. If a taxpayer operates an illegal business, no deductions are permitted.
a. True
b. False
ANSWER: False
RATIONALE: The usual expenses for operating an illegal business are deductible. But § 162
disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other
illegal payments. However, for illegal trafficking in drugs, § 280E disallows all
deductions.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
18. Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug-trafficking business do
not reduce taxable income.
a. True
b. False
ANSWER: True
RATIONALE: Cost of goods sold is part of the gross income calculation and is not considered to be
an expense. Thus, the § 280E prohibition on deductions does not affect cost of goods
sold.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 9Chapter 05: Business Deductions
19. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S.
citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state
law, the contribution by Cassie is deductible while that by Jacques is not.
a. True
b. False
ANSWER: False
RATIONALE: Deductions are not permitted for political contributions.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
20. A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary
expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.
a. True
b. False
ANSWER: True
RATIONALE: The $1 million limit on deducting compensation applies only to executive
compensation of publicly traded companies.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 10Chapter 05: Business Deductions
21. For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is
deductible only if the taxpayer acquires the business.
a. True
b. False
ANSWER: False
RATIONALE: For a taxpayer who is engaged in a trade or business, the cost of investigating a
business in the same field is deductible regardless of whether or not it is acquired.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
22. Investigation of a business unrelated to one’s present business never results in a current-period deduction of the
entire amount if the amount of the investigation expenses exceeds $5,000.
a. True
b. False
ANSWER: True
RATIONALE: Even if the business is acquired, some or all of the expenses (depending on the total
amount of the expenses) must be capitalized and amortized over a minimum 180-
month period. If the business is not acquired, no deduction results.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 11Chapter 05: Business Deductions
23. If a publicly traded corporation hires a new CEO in 2019 and she earns $12,000,000 from a performance-based
compensation plan, the corporation can deduct the entire $12,000,000.
a. True
b. False
ANSWER: False
RATIONALE: Under the TCJA of 2017, the excessive executive compensation limit applies to
performance-based compensation plans. The corporation can deduct only
$1,000,000 of the CEO’s compensation.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
24. LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being
allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000
paid for the land but can deduct the $150,000 paid for the building in the current tax year.
a. True
b. False
ANSWER: False
RATIONALE: Both the cost of the land and the building must be capitalized. The $150,000 paid for
the building can be depreciated over the MACRS statutory period.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 12Chapter 05: Business Deductions
25. Purchased goodwill must be capitalized but can be amortized over a 60-month period.
a. True
b. False
ANSWER: False
RATIONALE: Goodwill is a § 197 intangible. Although it must be capitalized, it can be amortized
over a 15-year statutory period.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
26. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000.
Marge’s recognized loss is $5,000, and Jason’s adjusted basis for the land is $25,000 ($20,000 cost + $5,000
recognized lossof Marge).
a. True
b. False
ANSWER: False
RATIONALE: Marge’s recognized loss is $0; Jason’s adjusted basis for the land is his cost of
$20,000.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 13Chapter 05: Business Deductions
27. For purposes of the § 267 loss disallowance provision, a taxpayer’s aunt is a related party.
a. True
b. False
ANSWER: False
RATIONALE: An aunt is not a related party for § 267 loss disallowance purposes.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
28. Research and experimental expenditures do not include the cost of consumer surveys.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 14Chapter 05: Business Deductions
29. The cost of depreciable property is not a research and experimental expenditure.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PM
30. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected
life of the research project if less than 60 months.
a. True
b. False
ANSWER: False
RATIONALE: The amortization period is not less than 60 months regardless of the life of the
research project.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 15Chapter 05: Business Deductions
31. On December 20, 2019, the directors of Quail Corporation (an accrual basis, calendar year C corporation) authorized
a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April
6, 2020, may be claimed as a deduction for tax year 2019.
a. True
b. False
ANSWER: True
RATIONALE: In order to be deductible in the year authorized by the board of directors, a charitable
contribution must be paid within 3 1/2 months of the end of the year of authorization
(April 15, 2020, in this case) and must involve an accrual basis corporation. Because
payment was made on April 6, 2020, the contribution is deductible in 2019.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PM
32. In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public
charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting five
years ago for $10,000. Oriole’s charitable contribution deduction is $30,000 (ignoring the taxable income limitation).
a. True
b. False
ANSWER: True
RATIONALE: The painting is capital gain property that the museum puts to a use that is related to
its exempt function. Thus, the amount of the deduction is equal to the fair market
value of the painting, or $30,000.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 16Chapter 05: Business Deductions
33. In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market
value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the
property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring
the taxable income limitation).
a. True
b. False
ANSWER: False
RATIONALE: The scientific property is ordinary income property but it qualifies for the increased
deduction amount available for certain corporate contributions of inventory. As such,
the amount of the deduction is equal to the lesser of (1) the sum of the inventory’s
basis plus 50% of the appreciation on the property [$40,000 = $30,000 + 50%
($50,000 – $30,000)] or (2) twice the basis [$60,000 = $30,000 × 2]. In this case, the
ceiling does not apply, and the deduction amount is $40,000.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 17Chapter 05: Business Deductions
34. The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded
corporation’s principal executive officer, principal financial officer, and board of directors.
a. True
b. False
ANSWER: False
RATIONALE: The $1 million limitation applies to compensation paid by a publicly traded corporation
to any covered employee, which is defined as the principal executive officer, the
principal financial officer, and the three other most highly compensated officers.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PM
35. Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2018 of $5,000. In 2019,
Heron made a further charitable contribution of $20,000. Heron’s 2019 deduction is limited to $15,000 (10% of
taxable income). The 2019 contribution must be applied first against the $15,000 limitation.
a. True
b. False
ANSWER: True
RATIONALE: The current-year’s (2019) contribution must be applied first against the taxable
income limitation and the carryover (2018) used last.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Application
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 18Chapter 05: Business Deductions
36. Property that is classified as personalty may be depreciated.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
37. The basis of cost recovery property must be reduced by at least the cost recovery allowable.
a. True
b. False
ANSWER: True
RATIONALE: The basis of cost recovery property must be reduced by the cost recovery allowed
but not less than the cost recovery allowable.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 19Chapter 05: Business Deductions
38. The key date for calculating cost recovery is the date the asset is placed in service.
a. True
b. False
ANSWER: True
RATIONALE: The key date for calculating cost recovery is the date the asset is placed in service,
not the purchase date.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
39. Land improvements are generally not eligible for cost recovery.
a. True
b. False
ANSWER: False
RATIONALE: Land improvements are 15-year class property.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 20Chapter 05: Business Deductions
40. The cost recovery basis for property converted from personal use to business use may be the fair market value of
the property at the time of the conversion.
a. True
b. False
ANSWER: True
RATIONALE: This would occur for the loss basis if the fair market value were less than the
adjusted basis of the property.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
41. The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
a. True
b. False
ANSWER: False
RATIONALE: MACRS uses both 200% and 150% declining balance depending on the class of the
property.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 21Chapter 05: Business Deductions
42. The cost recovery period for three-year class property is four years.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
43. New and used personal property placed in service in 2019 and used in a trade or business qualifies for additional
first-year depreciation.
a. True
b. False
ANSWER: True
RATIONALE: Prior to 2018, only new property placed in service qualified for additional first-year
depreciation.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 22Chapter 05: Business Deductions
44. If more than 40% of the value of property other than real property is placed in service during the last quarter, all of
the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
45. Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point
of the quarter in which it is placed in service.
a. True
b. False
ANSWER: False
RATIONALE: All property sold is treated as being sold at the mid-point of the quarter in which it is
sold.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 23Chapter 05: Business Deductions
46. The factor for determining the cost recovery for eligible real estate under MACRS in the year of disposition is taken
from the month of the disposition.
a. True
b. False
ANSWER: False
RATIONALE: The factor is taken from the month the real estate is placed in service.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
47. Motel buildings have a cost recovery period of 27.5 years.
a. True
b. False
ANSWER: False
RATIONALE: Motel buildings are classified as nonresidential real estate with a recovery period of
39 years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 24Chapter 05: Business Deductions
48. Taxpayers may elect to use the straight-line method under MACRS for personalty.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
49. Under the MACRS straight-line election for personalty, only the half-year convention is applicable.
a. True
b. False
ANSWER: False
RATIONALE: The mid-quarter convention is applicable under the MACRS straight-line election for
personalty.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 25Chapter 05: Business Deductions
50. For personal property placed in service in 2019, the § 179 maximum deduction is $1,020,000.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
51. The § 179 deduction can exceed $1,020,000 in 2019 if the taxpayer had a § 179 amount that exceeded the taxable
income limitation in the prior year.
a. True
b. False
ANSWER: False
RATIONALE: The § 179 amount eligible for expensing in a carryforward year is limited to the
lesser of (1) the statutory dollar amount ($1,000,000 in 2018 and $1,020,000 in 2019)
reduced by the cost of § 179 property placed in service in excess of the appropriate
acquisition limit in the carryforward year ($2,500,000 in 2018 and $2,550,000 in
2019), or (2) the business income limitation in the carryforward year.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 26Chapter 05: Business Deductions
52. Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward
year.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
53. The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000 even if $20,000
cannot be expensed in the current year because of the taxable income limitation.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 27Chapter 05: Business Deductions
54. Property used for the production of income is not eligible for § 179 expensing.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
55. The luxury auto cost recovery limits applies to all automobiles.
a. True
b. False
ANSWER: False
RATIONALE: The statutory cost recovery limits under § 280F apply only to automobiles that meet
the definition of a passenger automobile (e.g., do not apply to a taxi).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 28Chapter 05: Business Deductions
56. The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is
used as a taxi.
a. True
b. False
ANSWER: False
RATIONALE: The § 179 limit applies if the sports utility vehicle is used in a trade or business.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
57. Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the
property drops to 50% or less during the recovery period.
a. True
b. False
ANSWER: True
RATIONALE: If the business usage declines to 50% or less, the straight-line method must be used
and the property is subject to cost recovery recapture.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 29Chapter 05: Business Deductions
58. For a new car that is used predominantly in business, the “luxury auto” limit depends on whether the taxpayer takes
MACRS or straight-line depreciation.
a. True
b. False
ANSWER: False
RATIONALE: The statutory cost recovery limits apply regardless of whether MACRS or straight-
line depreciation is used.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
59. If an automobile is placed in service in 2019, the limitation for cost recovery in 2021 will be based on the cost
recovery limits for the year 2019.
a. True
b. False
ANSWER: True
RATIONALE: The cost recovery limits will be based on the limits in place when the automobile is
placed in service.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 30Chapter 05: Business Deductions
60. The “luxury auto” cost recovery limits change if mid-quarter cost recovery is used.
a. True
b. False
ANSWER: False
RATIONALE: The § 280F limits apply to all passenger automobiles regardless of the MACRS
convention used.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
61. The inclusion amount for a leased automobile is adjusted by a business usage percentage.
a. True
b. False
ANSWER: True
RATIONALE: The inclusion amount for a leased automobile is adjusted for business use.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 31Chapter 05: Business Deductions
62. A used $35,000 automobile that is used 100% for business is placed in service in 2019. If the automobile fails the
50% business usage test in the second year, no cost recovery will be recaptured.
a. True
b. False
ANSWER: False
RATIONALE: The total cost recovery deduction for the first year would be $7,000 ($35,000 x 20%)
which is less than $10,000 (§ 280F limit). The cost recovery in the first year using
straight-line would be $3,500 ($35,000 x 10%), which is less than $10,000 (§ 280F
limit). As a result, there is cost recovery recapture of $3,500.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
63. All listed property is subject to the substantiation requirements of § 274.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 32Chapter 05: Business Deductions
64. Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.
a. True
b. False
ANSWER: False
RATIONALE: The half-year and mid-quarter conventions apply.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
65. A taxpayer must use the alternative depreciation system (ADS) to compute depreciation for earnings and profits.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 33Chapter 05: Business Deductions
66. An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real
estate.
a. True
b. False
ANSWER: False
RATIONALE: The election is made on a class-by-class basis for property other than eligible real
property.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
67. For real property, the ADS convention is the mid-month convention.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 34Chapter 05: Business Deductions
68. The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is
amortized over 10 years.
a. True
b. False
ANSWER: False
RATIONALE: A covenant not to compete is amortized over a statutory 15 years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
69. Goodwill associated with the acquisition of a business cannot be amortized.
a. True
b. False
ANSWER: False
RATIONALE: Such goodwill is a § 197 intangible and is amortized over a 15-year period.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 35Chapter 05: Business Deductions
70. A purchased trademark is a § 197 intangible.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
71. If startup expenses total $53,000, $51,000 of those costs are amortized over 180 months.
a. True
b. False
ANSWER: True
RATIONALE: A portion of the expenses ($2,000) can be deducted immediately (a $5,000 maximum
less the amount of startup expenses in excess of $50,000; $5,000 less $3,000 equals
$2,000). The balance ($51,000) will be amortized over 180 months.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 36Chapter 05: Business Deductions
72. The amortization period for $58,000 of startup expenses is 180 months.
a. True
b. False
ANSWER: True
RATIONALE: As startup expenses exceed $55,000, no amount can be deducted immediately.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
73. Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
a. True
b. False
ANSWER: True
RATIONALE: Cost depletion is determined by multiplying the depletion cost per unit by the number
of units sold (not produced).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-10 – LO: 5-10
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 37Chapter 05: Business Deductions
74. Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.
a. True
b. False
ANSWER: True
RATIONALE: Percentage depletion can be taken even though the basis in the asset has been
reduced to zero by depletion deductions.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-10 – LO: 5-10
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
75. Intangible drilling costs are capitalized and recovered through depletion.
a. True
b. False
ANSWER: False
RATIONALE: The taxpayer may elect to expense the intangible drilling costs.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-10 – LO: 5-10
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 38Chapter 05: Business Deductions
76. Under MACRS, equipment falling in the 7-year MACRS class will be cost recovered over seven tax years.
a. True
b. False
ANSWER: False
RATIONALE: MACRS uses the half-year convention for property other than real estate. As a
result, a 7-year asset will be cost recovered over eight tax years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
77. If a taxpayer has a business with a net operating loss carryover reducing current year income, the taxpayer may
want to elect to use straight-line depreciation to slow down the cost recovery.
a. True
b. False
ANSWER: True
RATIONALE: If a taxpayer has a new business with little income or a business with a net operating
loss carryover, the taxpayer should consider electing to use straight-line depreciation
to slow down the cost recovery and preserve the deductions for later, higher tax rate
years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 39Chapter 05: Business Deductions
78. When a business is being purchased, if possible, the purchaser should bargain for more of the purchase price being
allocated to goodwill and covenants not to compete rather than depreciable assets.
a. True
b. False
ANSWER: False
RATIONALE: When a business is being purchased, goodwill and covenants not to compete are both
subject to a statutory amortization period of 15 years. Under MACRS, most assets
are cost recovered over 5 or 7 years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
79. Under MACRS, the double-declining balance method is used for property other than real estate with a recovery
period of 15 or 20 years.
a. True
b. False
ANSWER: False
RATIONALE: MACRS specifies the use of the 150%-declining balance method for 15- and 20-
year MACRS assets. Double-declining balance is used for 3-, 5-, 7-, and 10- year
assets under MACRS.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 40Chapter 05: Business Deductions
80. Assets that do not have a determinable useful life are not eligible for cost recovery under MACRS.
a. True
b. False
ANSWER: True
RATIONALE: Assets that do not decline in value on a predictable basis or that do not have a
determinable useful life (e.g., land, stock, and antiques) are not eligible for cost
recovery.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
81. Land costs generally are amortized rather than being cost recovered under MACRS.
a. True
b. False
ANSWER: False
RATIONALE: Because land has an indefinite useful life, it cannot be cost recovered, depleted, or
amortized.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-MeasurementAICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 41Chapter 05: Business Deductions
82. The amount of startup expenditures that can be deducted in the year incurred is the greater of the actual amount of
such expenses or $5,000.
a. True
b. False
ANSWER: False
RATIONALE: The maximum amount that can be expensed is the lesser of these two amounts, and
the $5,000 is reduced dollar-for-dollar once startup expenditures exceed $50,000. So
if startup expenditures equal or exceed $50,000, the expenditures would be amortized
over 180 months.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
Multiple Choice
83. Which of the following is not a “trade or business” expense?
a. Interest on business indebtedness.
b. Property taxes on business property.
c. Parking ticket paid on business auto.
d. Depreciation on business property.
e. All of these are “trade or business” expenses.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 42Chapter 05: Business Deductions
84. Which of the following is a required test for the deduction of a business expense?
a. Ordinary
b. Necessary
c. Reasonable
d. All of these
e. None of these
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 43Chapter 05: Business Deductions
85. Paula is the sole shareholder of Violet, Inc. For 2019, she receives from Violet a salary of $300,000 and dividends of
$100,000. Violet’s taxable income for 2019 is $500,000. On audit, the IRS treats $100,000 of Paula’s salary as
unreasonable. Which of the following statements is correct?
a. Paula’s gross income will increase by $100,000 as a result of the IRS adjustment.
b. Violet’s taxable income will not be affected by the IRS adjustment.
c. Paula’s gross income will decrease by $100,000 as a result of the IRS adjustment.
d. Violet’s taxable income will decrease by $100,000 as a result of the IRS adjustment.
e. None of these is correct.
ANSWER: e
RATIONALE: $100,000 of salary is reclassified as a dividend. Thus, Violet’s taxable income
increases by $100,000 because dividends are not deductible. Paula’s gross income
remains the same. Her salary income decreases by $100,000, but her dividend
income increases by $100,000.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 44Chapter 05: Business Deductions
86. During 2018, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees
have earned salaries of $20,000, which are not paid by Silver until early in 2019. What is the amount of the deduction
for salary expense?
a. If Silver uses the cash method, $175,000 in 2018 and $0 in 2019.
b. If Silver uses the cash method, $0 in 2018 and $195,000 in 2019.
c. If Silver uses the accrual method, $175,000 in 2018 and $20,000 in 2019.
d. If Silver uses the accrual method, $195,000 in 2018 and $0 in 2019.
e. None of these is correct.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 45Chapter 05: Business Deductions
87. Benita incurred a business expense on December 10, 2019, which she charged on her bank credit card. She paid the
credit card statement that included the charge on January 5, 2020. Which of the following is correct?
a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2020.
b. If Benita is an accrual method taxpayer, she can deduct the expense in 2019.
c. If Benita uses the accrual method, she can choose to deduct the expense in either 2019 or 2020.
d. Only b. and c. are correct.
e. Choices a., b., and c. are correct.
ANSWER: b
RATIONALE: Choice a. is incorrect because charging the expense on a bank credit card is treated
as a constructive payment. Thus, as a cash method taxpayer, she can deduct the
expense in 2019. If Benita uses the accrual method, she deducts the expense in
2019. In any event, she does not merely choose the year in which to deduct the
expense (choice c.).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 46Chapter 05: Business Deductions
88. Payments by a cash basis taxpayer of capital expenditures:
a. Must be expensed at the time of payment.
b. Must be expensed by the end of the first year after the asset is acquired.
c. Must be deducted over the actual or statutory life of the asset.
d. Can be deducted in the year the taxpayer chooses.
e. None of these.
ANSWER: c
RATIONALE: Both cash basis and accrual basis taxpayers are required to recover the cost of
capital assets through amortization, depletion, or depreciation over the actual or
statutory life of the asset.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 47Chapter 05: Business Deductions
89. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During
2019, the following associated with bad debts occur .
Credit sales $400,000
Collections on credit sales 250,000
Amount added to the reserve 10,000
Beginning balance in the reserve –0–
Identifiable bad debts during 2019 12,000
The amount of the deduction for bad debt expense for Petal for 2019 is:
a. $10,000.
b. $12,000.
c. $22,000.
d. $140,000.
e. None of these.
ANSWER: b
RATIONALE: Only the specific charge-off method can be used. Reserves for estimated expenses
are not allowed for tax purposes because the economic performance test cannot be
satisfied.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 48Chapter 05: Business Deductions
90. Rex, a cash basis calendar year taxpayer, runs a bingo operation that is illegal under state law. During 2019, a bill
designated H.R. 9 is introduced into the state legislature, which, if enacted, would legitimize bingo games. In 2019,
Rex had the following expenses:
Operating expenses in conducting bingo games $247,000
Payoff money to state and local police 24,000
Newspaper ads supporting H.R. 9 3,000
Political contributions to legislators who support H.R. 9 8,000
Of these expenditures, Rex may deduct:
a. $247,000.
b. $250,000.
c. $258,000.
d. $282,000.
e. None of these.
ANSWER: a
RATIONALE: Rex can deduct only the $247,000 of operating expenses.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 49Chapter 05: Business Deductions
91. Andrew, who operates a laundry business, incurred the following expenses during the year.
∙ Parking ticket of $250 for one of his delivery vans that parked illegally.
∙ Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
∙ DUI ticket of $500 while returning from the rock concert.
∙ Attorney’s fee of $600 associated with the DUI ticket.
What amount can Andrew deduct for these expenses?
a. $0.
b. $250.
c. $600.
d. $1,425.
ANSWER: a
RATIONALE: None of these expenses is deductible. The $75 parking ticket, the $500 DUI ticket,
and the $600 attorney fee are all personal expenses. The $250 parking ticket,
although related to his laundry business, is not deductible because it is a violation of
public policy.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 50Chapter 05: Business Deductions
92. Which of the following may be deductible in 2019?
a. Bribes that relate to a U.S. business.
b. Fines paid for violations of the law.
c. Interest on a loan used in a hobby.
d. All of these.
e. None of these.
ANSWER: e
RATIONALE: Choices a. and b. are not deductible. Interest incurred in connection with a hobby is
no longer deductible since 2% miscellaneous itemized deductions are no longer
allowed.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 51Chapter 05: Business Deductions
93. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates
a drug-running business. Both businesses have gross revenues of $500,000. The businesses incur the following
expenses.
Terry Jim
Employee salaries $200,000 $200,000
Bribes to police 25,000 25,000
Rent and utilities 50,000 50,000
Cost of goods sold –0– 125,000
Which of the following statements is correct?
a. Neither Terry nor Jim can deduct any of these items in calculating the business profit.
b. Terry should report profit from his business of $250,000.
c. Jim should report profit from his business of $500,000.
d. Jim should report profit from his business of $250,000.
e. None of these.
ANSWER: b
RATIONALE: Terry and Jim should report net profit from their businesses as follows:
Terry Jim
Gross revenues $500,000 $500,000
Less: Cost of goods sold (–0–) (125,000)
Gross income $500,000 $375,000
Less: Expenses
Employee salaries (200,000) (–0–)
Rent and utilities (50,000) (–0–)
Bribes to police (–0–) (–0–)
Net profit $250,000 $375,000
For Terry, the bribes to the police of $25,000 cannot be deducted. None of Jim’s
expenses can be deducted. However, the cost of goods sold is viewed as a negative
item in calculating gross income (i.e., gross income = gross profit) rather than as a
deduction.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 52Chapter 05: Business Deductions
94. Tom operates an illegal drug-running operation and incurred the following expenses:
Salaries $ 75,000
Illegal kickbacks 20,000
Bribes to border guards 25,000
Cost of goods sold 160,000
Rent 8,000
Interest 10,000
Insurance on furniture and fixtures 6,000
Utilities and telephone 20,000
Which of the following amounts reduces his taxable income?
a. $119,000.
b. $160,000.
c. $279,000.
d. $324,000.
e. None of these.
ANSWER: b
RATIONALE: Cost of goods sold of $160,000 is treated as a negative item in calculating gross
income rather than as a deduction. For a drug dealer, all deductions are disallowed.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 53Chapter 05: Business Deductions
95. For a president of a publicly held corporation hired in 2019, which of the following is not subject to the $1 million limit
on executive compensation?
a. Contribution to medical insurance plan.
b. Contribution to pension plan.
c. Premiums on group term life insurance of $50,000.
d. Only b. and c. are not subject to the limit.
e. Choices a., b., and c., are not subject to the limit.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 54Chapter 05: Business Deductions
96. Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast-food franchise. If
Tommy decides not to acquire the fast-food franchise, any investigation expenses are:
a. A deduction for AGI.
b. A deduction from AGI, subject to the 2% floor.
c. A deduction from AGI, not subject to the 2% floor.
d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
e. Not deductible.
ANSWER: e
RATIONALE: Since Tommy is not in a business that is the same as or similar to the one being
investigated and did not acquire the new business, his investigation expenses cannot
be deducted.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 55Chapter 05: Business Deductions
97. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida and wants to expand
to other states. During 2019, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to
investigate TV rental stores in Georgia. She acquires the South Carolina operations but not the outlets in Georgia. As
to these expenses, Iris should:
a. Capitalize $14,000 and not deduct $9,000.
b. Expense $23,000 for 2019.
c. Expense $9,000 for 2019 and capitalize $14,000.
d. Capitalize $23,000.
e. None of these.
ANSWER: b
RATIONALE: Since Iris owns and operates TV rental outlets, all of the investigation expenses can
be deducted regardless of whether she acquires the businesses.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 56Chapter 05: Business Deductions
98. Which of the following statements is correct in connection with the investigation of a business?
a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the
project is abandoned.
b. Expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of
whether the business being investigated is acquired.
c. That business must be related to the taxpayer’s present business for any expense ever to be deductible.
d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be
capitalized and amortized.
e. None of these.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
99. Which of the following must be capitalized by a business?
a. Replacement of a windshield of a business truck that was broken in an accident.
b. Repair of a roof of a building used in business.
c. Amount paid for a covenant not to compete.
d. Only b. and c. must be capitalized.
e. Choices a., b., and c. can be expensed rather than capitalized.
ANSWER: c
RATIONALE: All of these expenses, except for the covenant, can be deducted in the current tax
year. The amortization period for the covenant is 15 years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 57Chapter 05: Business Deductions
100. On January 2, 2019, Fran acquires a business from Chuck. Among the assets purchased are the following
intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.
Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of
the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for
2019?
a. $10,667.
b. $16,000.
c. $20,000.
d. $32,667.
e. None of these.
ANSWER: c
RATIONALE: All of these intangibles are § 197 intangibles and are amortized over a 15-year
statutory period.
Patent $140,000 ÷ 15 = $ 9,333
Covenant $60,000 ÷ 15 = 4,000
Goodwill $100,000 ÷ 15 = 6,667
$20,000
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 58Chapter 05: Business Deductions
101. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of
the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is
the tax effect of these transactions?
a. Disallowed loss to James of $2,000; gain to Lance of $1,000.
b. Disallowed loss to Lance of $2,000; gain to James of $3,000.
c. Deductible loss to Lance of $2,000; gain to James of $3,000.
d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
e. None of these.
ANSWER: d
RATIONALE: Lance’s realized loss of $2,000 ($24,000 – $26,000) is disallowed. James may reduce
his realized gain of $3,000 ($27,000 – $24,000) by Lance’s disallowed loss of $2,000.
So James’ recognized gain is $1,000.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 59Chapter 05: Business Deductions
102. Which of the following is not a related party for constructive ownership purposes under § 267?
a. The taxpayer’s aunt.
b. The taxpayer’s brother.
c. The taxpayer’s grandmother.
d. A corporation owned more than 50% by the taxpayer.
e. None of these.
ANSWER: a
RATIONALE: Taxpayer’s aunt is not a related party under § 267.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 60Chapter 05: Business Deductions
103. Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of
the following statements is correct?
a. Nikeya’s recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis).
b. Shamed’s adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).
c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.
d. Only a. and b. are correct.
e. Choices a., b., and c. are correct.
ANSWER: c
RATIONALE: Nikeya’s realized loss of $25,000 ($95,000 amount realized – $120,000 adjusted
basis) is disallowed because Shamed is a related party. Shamed’s adjusted basis for
the land is his cost of $95,000. However, when he sells the land for $112,000, his
realized gain of $17,000 ($112,000 amount realized – $95,000 adjusted basis) is not
recognized because he can offset it against $17,000 of Nikeya’s $25,000 disallowed
loss in calculating his taxable income.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 61Chapter 05: Business Deductions
104. Regarding research and experimental expenditures, which of the following are not qualified expenditures?
a. Costs of ordinary testing of materials.
b. Costs to develop a plant process.
c. Costs of developing a formula.
d. Depreciation on a building used for research.
e. All of these are qualified expenditures.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 62Chapter 05: Business Deductions
105. Blue Corporation incurred the following expenses in connection with the development of a new product:
Salaries $100,000
Utilities 18,000
Materials 25,000
Advertising 5,000
Market survey 3,000
Depreciation on machine 9,000
Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental
expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for
the current year.
a. $0
b. $118,000
c. $143,000
d. $152,000
e. $160,000
ANSWER: a
RATIONALE: The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 +
$9,000). Under the election to amortize, the monthly amortization is $2,533 ($152,000
÷ 60 months). However, since sales will not start until next year, there is no
deduction for the current year.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 63Chapter 05: Business Deductions
106. Last year, Green Corporation incurred the following expenditures in the development of a new plant process:
Salaries $250,000
Materials 90,000
Utilities 20,000
Quality control testing costs 40,000
Management study costs 5,000
Depreciation of equipment 18,000
During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60
month deferral and amortization period, determine the amount of the deduction for the current year.
a. $48,000
b. $50,400
c. $54,667
d. $57,067
e. None of these.
ANSWER: b
RATIONALE: Salary $250,000
Materials 90,000
Utilities 20,000
Depreciation 18,000
Research and experimental costs $378,000
Current deduction $50,400 [($378,000 ÷ 60) × 8 months] Neither the quality control
testing costs nor the management study costs are research and experimental
expenditures.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 64Chapter 05: Business Deductions
107. Owl Corporation (a C corporation), a retailer of children’s apparel, made the following donations to qualified
charitable organizations this year.
Adjusted Basis Fair Market Value
Children’s clothing held as inventory, to Haven
for Hope $10,000 $15,000
Stock in Exxon Corporation acquired two
years ago and held as an investment, to City
University
5,000 3,000
Land acquired four years ago and held as an
investment, to Humane Society
50,000 75,000
How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation)?
a. $63,000
b. $65,000
c. $90,500
d. $92,500
e. None of these.
ANSWER: c
RATIONALE: Since Owl is a C corporation and the inventory exception is met, one-half of the
appreciation on the clothing may be claimed, or $2,500 [0.50($15,000 – $10,000)].
Therefore, $12,500 ($10,000 basis + $2,500 appreciation) is the contribution amount
for the inventory. The Exxon stock was loss property (fair market value less than
basis); therefore, the contribution amount is the stock’s fair market value, or $3,000.
The land is capital gain property, an appreciated capital asset held more than one
year, and the contribution amount is the land’s fair market value, or $75,000. Thus,
the total amount of contributions for Owl Corporation is $90,500 ($12,500 + $3,000 +
$75,000).
POINTS: 1
DIFFICULTY: Challenging
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 65Chapter 05: Business Deductions
108. Plum Corporation (a C corporation and a computer manufacturer) donated 100 laptop computers to a local university
(a qualified educational organization) this year. The computers were constructed by Plum earlier this year, and the
university will use the computers for research and research training. Plum’s basis in the computers is $35,000, and
their fair market value is $120,000. What is Plum’s deduction for the contribution of the computers (ignoring the
taxable income limitation)?
a. $35,000
b. $70,000
c. $77,500
d. $85,000
e. $120,000
ANSWER: b
RATIONALE: The contribution of computers qualifies for the increased contribution amount
available with respect to certain inventory. The contribution amount is equal to the
lesser of (1) the sum of the property’s basis plus 50% of the appreciation on the
property [$77,500 = $35,000 basis + 0.50 ($120,000 fair market value – $35,000
basis)] or (2) twice the property’s basis ($70,000 = 2 × $35,000 basis). Thus, Plum’s
deduction for the charitable contribution of the inventory is $70,000.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 66Chapter 05: Business Deductions
109. Wanda is the Chief Executive Officer of Pink corporation, a publicly traded, calendar year C corporation. For the
current year, Wanda’s compensation package consists of:
Cash compensation $ 2,500,000
Nontaxable fringe benefits 250,000
Taxable fringe benefits 150,000
Bonus tied to company performance 2,000,000
How much of Wanda’s compensation is deductible by Pink Corporation?
a. $1,000,000.
b. $1,250,000.
c. $3,250,000.
d. $4,900,000.
e. None of these.
ANSWER: b
RATIONALE: Wanda is a covered employee for purposes of the deduction limitation on executive
compensation. As such, Pink Corporation can deduct $1,250,000 of Wanda’s
compensation package: $1,000,000 limitation (applicable to the $2,500,000 cash
compensation + $150,000 taxable fringe benefits + $2,000,000 bonus) + $250,000
nontaxable fringe benefits.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 67Chapter 05: Business Deductions
110. Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during
the current year. The machine was placed in service in January of the following year. No assets were purchased in
the following year. Grape’s cost recovery would begin:
a. In the current year using a mid-quarter convention.
b. In the current year using a half-year convention.
c. In the following year using a mid-quarter convention.
d. In the following year using a half-year convention.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
111. Which of the following assets would be subject to cost recovery?
a. A painting by Picasso hanging on a physician’s office wall.
b. An antique vase in a doctor’s waiting room.
c. Landscaping around the doctor’s office.
d. Choices a., b., and c.
e. None of these.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 68Chapter 05: Business Deductions
112. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the
conversion, the machine was worth $90,000. Five years ago, Tab purchased the machine for $120,000. The machine
is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?
a. $70,000
b. $90,000
c. $120,000
d. $140,000
e. None of these.
ANSWER: b
RATIONALE: The basis is $90,000, the lower of the adjusted basis ($120,000) or fair market value
($90,000) at the date of conversion. The mortgage of $50,000 does not affect
adjusted basis.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 69Chapter 05: Business Deductions
113. Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the
three years the machine was used are computed as follows.
Cost Recovery Allowed Cost Recovery Allowable
Year 1 $16,000 $ 8,000
Year 2 9,600 12,800
Year 3 5,760 7,680
If Tara sells the machine after three years for $15,000, how much gain should she recognize?
a. $3,480
b. $6,360
c. $9,240
d. $11,480
ANSWER: d
RATIONALE: Cost $ 40,000
Less the greater of cost recovery allowed or allowable
($16,000 + $12,800 + $7,680) (36,480)
Adjusted basis $ 3,520
The recognized gain is $11,480 ($15,000 – $3,520).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 70Chapter 05: Business Deductions
114. Hazel purchased a new business asset (five-year asset) on September 30, 2019, at a cost of $100,000. On October
4, 2019, she placed the asset in service. This was the only asset she placed in service in 2019. Hazel did not elect
§ 179 or additional first-year depreciation. On August 20, 2020, Hazel sold the asset. Determine the cost recovery
for 2020 for the asset.
a. $14,250
b. $19,000
c. $23,750
d. $38,000
ANSWER: c
RATIONALE: The asset was placed in service in October 2019; as a result, the mid-quarter
convention is used. 2020 is the second year of cost recovery. [$100,000 × 0.38 ×
(2.5/4) = $23,750.]
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 71Chapter 05: Business Deductions
115. Tan Company acquires a new machine (10-year property) on January 15, 2019, at a cost of $200,000. Tan also
acquires another new machine (7-year property) on November 5, 2019, at a cost of $40,000. No election is made to
use the straight-line method. The company does not make the § 179 election and elects to not take additional first-
year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2019.
a. $24,000
b. $25,716
c. $102,000
d. $132,858
e. None of these.
ANSWER: b
RATIONALE: The total cost recovery is computed as follows.
10-year property
MACRS cost recovery ($200,000 × 0.10) $20,000
7-year property
MACRS cost recovery ($40,000 × 0.1429) 5,716
Total cost recovery $25,716
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 72Chapter 05: Business Deductions
116. James purchased a new business asset (three-year personalty) on July 23, 2019, at a cost of $40,000. James takes
additional first-year depreciation but does not elect Section 179 expense on the asset. Determine the cost recovery
deduction for 2019.
a. $8,333
b. $26,666
c. $33,333
d. $40,000
ANSWER: d
RATIONALE: Additional first-year depreciation ($40,000 × 100%) $40,000
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 73Chapter 05: Business Deductions
117. Alice purchased office furniture on September 20, 2018, for $100,000. On October 10, 2018, she purchased business
computers for $80,000. Alice placed all of the assets in service on January 15, 2019. She did not elect to expense
any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year
depreciation. Determine the cost recovery deduction for the business assets for 2019.
a. $6,426
b. $14,710
c. $25,722
d. $30,290
ANSWER: d
RATIONALE: The half-year convention applies.
Regular MACRS
Furniture (seven-year property)
$100,000 × 0.1429 $14,290
Computers (five-year property)
$80,000 × 0.20 16,000
Total cost recovery $30,290
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 74Chapter 05: Business Deductions
118. Barry purchased a used business asset (seven-year property) on September 30, 2019, at a cost of $200,000. This is
the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not
claim additional first-year depreciation, and did not elect straight-line cost recovery. Barry sold the asset on July 17,
2020. Determine the cost recovery deduction for 2020.
a. $19,133
b. $24,490
c. $34,438
d. $55,100
ANSWER: b
RATIONALE: The half-year convention applies [$200,000 × 0.2449 × 1/2 = $24,490].
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 75Chapter 05: Business Deductions
119. Bonnie purchased a new business asset (five-year property) on March 10, 2019, at a cost of $30,000. She also
purchased a new business asset (seven-year property) on November 20, 2019, at a cost of $13,000. Bonnie did not
elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes
additional first-year depreciation. Determine the cost recovery deduction for 2019 for these assets.
a. $7,858
b. $9,586
c. $21,915
d. $43,000
ANSWER: d
RATIONALE: The half-year convention applies in this case.
Five-year
property:
Additional first-year depreciation
($30,000 × 100%) $30,000
Seven-year
property:
Additional first-year depreciation
($13,000 × 100%) 13,000
Total cost
recovery $43,000
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 76Chapter 05: Business Deductions
120. Doug purchased a new factory building on January 15, 1991, for $400,000. On March 1, 2019, the building was sold.
Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method.
a. $0
b. $1,587
c. $2,645
d. $12,696
ANSWER: c
RATIONALE: 0.03174 × $400,000 × 2.5/12 = $2,645. Nonresidential real estate placed in service
after December 31, 1986, and before May 13, 1993 (31.5-year life).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
121. Cora purchased a hotel building on May 17, 2019, for $3,000,000. Determine the cost recovery deduction for 2020.
a. $48,150
b. $59,520
c. $69,000
d. $76,920
ANSWER: d
RATIONALE: The hotel building is nonresidential realty. 0.02564 × $3,000,000 = $76,920.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 77Chapter 05: Business Deductions
122. Carlos purchased an apartment building on November 16, 2019, for $3,000,000. Determine the cost recovery for
2019.
a. $9,630
b. $11,910
c. $13,950
d. $22,740
ANSWER: d
RATIONALE: $3,000,000 × 0.00455 = $13,650.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
123. Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on February 2,
2019. Determine the cost recovery deduction for the year of the sale.
a. $16,025
b. $19,838
c. $26,458
d. $158,750
ANSWER: b
RATIONALE: 0.03174 × $5,000,000 × 1.5/12 = $19,838. Nonresidential real estate placed in
service before May 3, 1993 (31.5-year life).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 78Chapter 05: Business Deductions
124. On May 30, 2018, Jane purchased a factory building to use for her business. In August 2019, Jane paid $300,000 for
improvements to the building. Determine Jane’s total deduction with respect to the building improvements for 2019.
a. $2,889
b. $4,173
c. $4,815
d. $25,000
ANSWER: a
RATIONALE:
MACRS cost recovery ($300,000 × 0.00963); 39-year real
property; month 8 $2,889
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 79Chapter 05: Business Deductions
125. White Company acquires a new machine (seven-year property) on January 10, 2019, at a cost of $620,000. White
makes the election to expense the maximum amount under § 179, and wants to take any additional first-year
depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in
calculating taxable income related to the machine for 2019 assuming White has taxable income of $800,000.
a. $88,598
b. $301,159
c. $568,574
d. $620,000
ANSWER: d
RATIONALE: § 179 expense $620,000
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 80Chapter 05: Business Deductions
126. In 2018, Gail had a § 179 deduction carryover of $30,000. In 2019, she elected § 179 for an asset acquired at a cost
of $115,000. Gail’s § 179 business income limitation for 2019 is $140,000. Determine Gail’s § 179 deduction for 2019.
a. $25,000
b. $115,000
c. $130,000
d. $140,000
ANSWER: d
RATIONALE: $145,000 [ $30,000 + $115,000(limited to $140,000)].
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 81Chapter 05: Business Deductions
127. The only asset Bill purchased during 2019 was a new seven-year class asset. The asset, which was listed property,
was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of
income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179
whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill’s
maximum deduction with respect to the property for 2019.
a. $1,428
b. $2,499
c. $26,749
d. $33,375
ANSWER: b
RATIONALE: The listed property does not pass the predominantly business usage test. Therefore,
neither § 179 expensing nor additional first-year depreciation can be taken. In
addition, only straight-line cost recovery can be used.
Maximum deduction ($50,000 × 0.0714 × 70%) $2,499
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 82Chapter 05: Business Deductions
128. Augie purchased one new asset during the year (five-year property) on November 10, 2019, at a cost of $660,000.
She would like to use the § 179 election and will also take additional first-year depreciation. The income from the
business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the maximum cost
recovery deduction available on this asset for 2019.
a. $30,500
b. $580,200
c. $600,000
d. $660,000
ANSWER: d
RATIONALE: Although mid-quarter convention would apply to the MACRS calculation, Augie can
elect to use bonus depreciation on the asset (and neither the mid-quarter convention
nor the § 179 income limitation will apply).
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 83Chapter 05: Business Deductions
129. Hans purchased a new passenger automobile on August 17, 2019, for $30,000. During the year, the car was used
40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2019.
a. $500
b. $1,000
c. $1,200
d. $1,333
ANSWER: c
RATIONALE: The car, which is listed property, does not pass the predominantly business usage
test. Therefore, neither § 179 expensing nor additional first-year depreciation can be
taken.
$30,000 × 0.100 = $3,000 (not over $10,000 limit*). $3,000 × 40% = $1,200.
*2018 amount; these depreciation limits are indexed annually.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 84Chapter 05: Business Deductions
130. On June 1, 2018, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and
30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional
first-year depreciation. Determine the cost recovery deduction for 2019.
a. $3,290
b. $3,570
c. $4,704
d. $10,000
ANSWER: c
RATIONALE: $21,000 × 32% = $6,720 (limited to $16,000*).
$6,720 × 70% = $4,704.
*These depreciation limits are indexed annually.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 85Chapter 05: Business Deductions
131. On June 1, 2019, James places in service a new automobile that cost $40,000. The car is used 60% for business and
40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional
first-year depreciation. Determine the cost recovery deduction for 2019.
a. $1,776
b. $1,896
c. $4,800
d. $6,000
ANSWER: c
RATIONALE: MACRS cost recovery ($40,000 × 0.20) × 0.60 $ 4,800
Limited to ($10,000* × 0.60) $6,000
* 2018 amount; the limits are indexed annually.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 86Chapter 05: Business Deductions
132. On May 2, 2019, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle
weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine Karen’s total cost
recovery for 2019. Karen wants to use both §179 and additional first-year depreciation.
a. $7,200
b. $25,500
c. $27,200
d. $36,000
ANSWER: d
RATIONALE: Cost for business use: $36,000 (60% × $60,000)
§ 179 expense $25,500
Additional first-year depreciation
[($36,000 – $25,500) x 100%] 10,500
MACRS cost recovery [($36,000 – $25,500 – $10,500) × 0.20] -0-
Total $36,000
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 87Chapter 05: Business Deductions
133. On July 17, 2018, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and
20% for personal use. In 2019, he used the automobile 40% for business and 60% for personal use. Determine the
cost recovery recapture for 2019.
a. $0
b. $528
c. $2,000
d. $2,500
ANSWER: c
RATIONALE: Cost recovery recapture in 2019:
MACRS ($25,000 × 0.20) = $5,000 (limited to $10,000*);
$5,000 × 80% $4,000
Straight-line ($25,000 × 0.10) = $2,500 (limited to
$10,000*); $2,500 × 80% (2,000)
Cost recovery recapture in 2019 $2,000
* These depreciation limits are indexed annually.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 88Chapter 05: Business Deductions
134. On July 10, 2019, Ariff places in service a new SUV that cost $70,000 and weighed 6,300 pounds. The SUV is used
100% for business. Determine Ariff’s maximum deduction for 2019, assuming Ariff’s § 179 business income is
$110,000. Ariff does not take additional first-year depreciation.
a. $2,960
b. $25,000
c. $34,000
d. $70,000
ANSWER: c
RATIONALE: Since the SUV weighs over 6,000 pounds, it is not subject to the statutory dollar
limits on luxury automobiles.
§ 179 expensing (limited to $25,500 for such SUVs) $25,500
Regular MACRS [($70,000 – $25,500) × 0.20] 8,900
Total $34,400
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 89Chapter 05: Business Deductions
135. On June 1, 2019, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming
the dollar amount from the IRS table for such leases is $241, determine Norm’s gross income inclusion amount.
a. $0
b. $241
c. $907
d. $1,687
ANSWER: a
RATIONALE: A taxi is not a passenger automobile. Thus, it is not subject to the lease inclusion
amount provision.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 90Chapter 05: Business Deductions
136. On March 1, 2019, Lana leases and places in service a passenger automobile. The lease will run for five years and
the payments are $500 per month. During 2019, she uses her car 60% for business and 40% for personal activities.
Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana’s gross income attributable to
the lease.
a. $0
b. $35
c. $59
d. $70
ANSWER: b
RATIONALE: $35 ($70 × 305/365 × 60%).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 91Chapter 05: Business Deductions
137. Bhaskar purchased a new factory building and land on September 10, 2019, for $3,700,000. ($500,000 of the
purchase price was allocated to the land.) He elected the alternative depreciation system (ADS). Determine the
cost recovery deduction for 2020.
a. $23,328
b. $80,000
c. $82,048
d. $92,500
ANSWER: b
RATIONALE: $80,000 (0.025 × $3,200,000).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
138. Pat purchased a used five-year class asset on March 15, 2019, for $60,000. He did not elect § 179 expensing.
Determine the cost recovery deduction for 2019 for earnings and profits purposes.
a. $2,000
b. $3,000
c. $6,000
d. $12,000
ANSWER: c
RATIONALE: $6,000 (0.10 × $60,000).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 92Chapter 05: Business Deductions
139. During the past two years, through extensive advertising and improved customer relations, Orange Corporation
estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of
goodwill Orange may amortize.
a. $100,000
b. $33,333
c. $26,667
d. $16,667
e. -0-.
ANSWER: e
RATIONALE: $0. Self-created goodwill is not a § 197 intangible and thus cannot be amortized.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 93Chapter 05: Business Deductions
140. On June 1, 2019, Red Corporation purchased an existing business. With respect to the acquired assets of the
business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the
total amount that Red may amortize for 2019 for the patent.
a. $0
b. $1,667
c. $11,667
d. $35,000
ANSWER: c
RATIONALE: $11,667 [$300,000 × (7 months/180 months)]. The statutory amortization period for §
197 intangibles is 15 years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 94Chapter 05: Business Deductions
141. Orange Corporation begins business on April 2, 2019. The corporation reports startup expenditures of $64,000 all
incurred last year. Determine the total amount that Orange can elect to deduct in 2019.
a. $0
b. $3,200
c. $4,267
d. $7,950
ANSWER: b
RATIONALE: Deductible amount [$5,000 – ($64,000 – $50,000)] $ –0–
Amortizable amount [($64,000 – $0)/180 × 9 months] 3,200
Total deduction $3,200
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 95Chapter 05: Business Deductions
142. On January 15, 2019, Vern purchased the rights to a mineral interest for $3,500,000. At that time, it was estimated142. On January 15, 2019, Vern purchased the rights to a mineral interest for $3,500,000. At that time, it was estimated
that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for
$800,000. Vern incurred expenses during 2019 of $500,000. The percentage depletion rate is 22%. Determine Vern’s
depletion deduction for 2019.
a. $150,000
b. $175,000
c. $176,000
d. $200,000
e. $250,000
ANSWER: b
RATIONALE: $3,500,000/500,000 = $7 per unit
25,000 units sold × $7 = $175,000 cost depletion
22% × $800,000 = $176,000 percentage depletion
Percentage limit ($800,000 – $500,000) × 50% = $150,000
Thus, the deduction is $175,000.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-10 – LO: 5-10
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 96Chapter 05: Business Deductions
143. Which of the following is not a characteristic of MACRS for property other than real estate?
a. MACRS uses shorter asset lives.
b. MACRS increases taxable income in the early years of the asset’s life.
c. MACRS accelerates cost recovery.
d. MACRS decreases taxable income in the early years of the asset’s life.
ANSWER: a
RATIONALE: Accelerated depreciation (either 200% or 150% declining balance) is used for
MACRS. As a result, cost recovery is accelerated to early years of an asset’s life.
This reduces taxable income (rather than increasing taxable income).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
144. Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?
a. Cost of asset.
b. Property recovery class.
c. Half-year convention.
d. Salvage (or residual) value.
ANSWER: d
RATIONALE: Salvage value is ignored under MACRS.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 97Chapter 05: Business Deductions
145. Which of the following depreciation conventions are not used under MACRS?
a. Full-month.
b. Mid-month.
c. Half-year.
d. Mid-quarter.
e. All of these are used under MACRS.
ANSWER: a
RATIONALE: The full-month convention is not used under MACRS. It is, however, used for
amortization (but this is a different tax provision).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 98Chapter 05: Business Deductions
146. A major objective of MACRS is to:
a. Reduce the amount of the cost recovery deduction on businesses tax returns.
b. Ensure that the amount of cost recovery for tax purposes will be the same as book depreciation.
c. Help companies achieve a faster write-off of their capital assets.
d. Require companies to use the actual economic lives of assets in calculating cost recovery for tax purposes.
e. All of these are major objectives.
ANSWER: c
RATIONALE: MACRS does help companies achieve a faster write-off of their capital assets.
MACRS does not reduce the amount of cost recovery deductions; MACRS
generally has shorter lives and, for property other than real estate, uses accelerated
methods, so MACRS cost recovery will not be the same as book depreciation;
economic lives are not used for MACRS cost recovery (although they are used to
place assets in MACRS classes).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 99Chapter 05: Business Deductions
147. On May 5 of the current tax year, Byrne purchased a patent that qualifies as a § 197 intangible. The cost of the
patent was $207,000 and Byrne is a calendar year taxpayer. In the current tax year, how much of the patent’s cost
may Byrne amortize?
a. $1,150.
b. $4,600.
c. $9,200.
d. $13,800.
ANSWER: c
RATIONALE: The patent cost can be amortized on a straight-line basis over 180 months. In the
year of acquisition, eight months of amortization can be deducted. So, $9,200 can be
amortized; ($207,000 ÷ 180 months) × 8 months.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 100Chapter 05: Business Deductions
148. Indigo Company acquires a new machine (5-year MACRS property) on February 2, 2019 at a cost of $100,000. On
November 18, 2019, Indigo also acquires office equipment (7-year MACRS property) at a cost of $50,000. Indigo
does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo’s
total MACRS deduction for 2019?
a. $27,145.
b. $30,000.
c. $36,785.
d. $150,000.
ANSWER: a
RATIONALE: Rationale: Normal MACRS applies; the mid-quarter convention does not apply
because only 33.33% of assets were placed in service during the last quarter of the
year).
5-year MACRS $100,000 × 0.2000 $20,000
7-year MACRS $50,000 × 0.1429 7,145
Total $27,145
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 101Chapter 05: Business Deductions
149. Maple Company purchases new equipment (7-year MACRS property) on January 10, 2019, at a cost of $430,000.
Maple also purchases new machines (5-year MACRS property) on July 19, 2019 at a cost of $290,000. Maple wants
to maximize its MACRS deductions; assume no taxable income limitations apply. What is Maple’s total MACRS
deduction for 2019?
a. $119,447.
b. $560,000.
c. $617,148.
d. $720,000.
ANSWER: d
RATIONALE: In 2019, the maximum § 179 deduction is $1,020,000. Additional first-year (bonus)
depreciation could also be claimed. As a result, the maximum MACRS deduction
for 2019 is $720,000 ($430,000 + $290,000).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 102Chapter 05: Business Deductions
150. Simpson Company, a calendar year taxpayer, acquires an apartment building on March 22, 2019 for $900,000. What
is the maximum cost recovery deduction it may take for 2019?
a. $18,297.
b. $22,617.
c. $25,911.
d. $31,365.
ANSWER: c
RATIONALE: An apartment building is residential real property. The mid-month convention applies.
So 2019 cost recovery is $25,911; $900,000 × 0.02879.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 103Chapter 05: Business Deductions
151. On January 1, 2019, SymboNet Company completed its acquisition of NetOpen. As part of the acquisition, $2 million
was allocated to goodwill. What is SymboNet’s amortization deduction related to the goodwill for 2019?
a. $0.
b. $100,000.
c. $133,333.
d. $200,000.
ANSWER: c
RATIONALE: The purchased goodwill can be amortized under § 197 over 15 years (180 months)
beginning with the month of acquisition. For 2019, SymboNet can amortize $133,333
[($2 million ÷ 180 months) × 12 months].
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 104Chapter 05: Business Deductions
152. On January 15, 2019, Dillon purchased the rights to a mineral interest for $3,500,000. At that time, it was estimated
that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for
$800,000. Dillon incurred expenses during 2019 of $500,000. The percentage depletion rate is 22%. Determine
Dillon’s depletion deduction for 2019.
a. $150,000.
b. $175,000.
c. $176,000.
d. $200,000.
ANSWER: b
RATIONALE:
Cost depletion: $3,500,000 ÷ 500,000 = $7 per unit
25,000 units sold × $7 per unit = $175,000 cost depletion
Percentage depletion: $800,000 × 22% = $176,000
Limit: ($800,000 − $500,000) × 50% = $150,000
Greater of cost or percentage depletion = $175,000
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-10 – LO: 5-10
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 105Chapter 05: Business Deductions
Subjective Short Answer
153. Sandra owns an insurance agency. The following selected data are taken from the agency balance sheet and income
statement prepared using the accrual method.
Revenue $250,000
Salaries and commissions 100,000
Rent 10,000
Insurance 5,000
Utilities 6,000
Accounts receivable, 1/1/2019 40,000
Accounts receivable, 12/31/2019 38,000
Accounts payable, 1/1/2019 12,000
Accounts payable, 12/31/2019 11,000
Calculate Sandra’s net profit using the cash method for 2019.
ANSWER: Sandra’s accrual method net profit is calculated as follows:
Revenue $250,000
Less: Expenses
Salaries and commissions $100,000
Rent 10,000
Insurance 5,000
Utilities 6,000 (121,000)
Net profit $129,000
To convert to cash method net profit, the following adjustments must be made.
Net profit-accrual method $129,000
Deduct: Decrease in accounts payable ($11,000 – $12,000) (1,000)
Add: Decrease in accounts receivable ($38,000 – $40,000) 2,000
Net profit-cash method $130,000
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 106Chapter 05: Business Deductions
154. Alfred’s Enterprises, an unincorporated entity, pays employee salaries of $100,000 during the year. At the end of the
year, $12,000 of additional salaries have been earned but not paid until the beginning of the next year.
a. Determine the amount of the deduction for salaries if Alfred is a cash method taxpayer.
b. Determine the amount of the deduction for salaries if Alfred is an accrual method taxpayer.
ANSWER: a. The deduction for salaries is the amount paid of $100,000.
b. The deduction for salaries is calculated as follows:
Salaries paid $100,000
Accrued salaries 12,000
Salary deduction $112,000
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 107Chapter 05: Business Deductions
155. Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced
his practice on February 1, 2019. In order to guarantee no rent increases during an 18-month period, he signed an 18-
month lease and prepaid the $90,000 on February 1, 2019. How much can Taylor deduct as rent expense for 2019?
ANSWER: Taylor is a cash basis taxpayer. Thus, he is eligible to use the 12-month rule on
prepayments. Since his prepayments of 18 months’ rent does not extend beyond the
end of 2020, he can deduct the $90,000 paid in 2019.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 108Chapter 05: Business Deductions
156. In order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18-
month lease for $36,000. The lease commences on October 1, 2019. How much of the $36,000 payment can she
deduct in 2019 and 2020?
a. If Mella is an accrual basis taxpayer?
b. If Mella is a cash basis taxpayer?
ANSWER:
a. As an accrual basis taxpayer, Mella can deduct the 2019 amount of the rent
expenses incurred in 2019 of $6,000 ($2,000 × 3 months) and the $24,000
($2,000 × 12 months) incurred in 2020.
b. Since Mella is a cash basis taxpayer, she can deduct the entire $36,000
prepayment in 2019 if she can satisfy the 12-month rule. However, since the
rental period of 18 months extends beyond the end of 2020, she fails the
requirement for the one-year rule. Consequently, she can deduct only $6,000 in
2019 and $24,000 in 2020.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 109Chapter 05: Business Deductions
157. Petula’s business sells heat pumps that have a one-year warranty. Based on historical data, the warranty costs
amount to 11% of sales. During 2019, heat pump sales are $400,000. Actual warranty expenses paid in 2019 are
$40,000.
a. Determine the amount of the warranty expense deduction for 2019 if Petula’s business uses
the accrual method.
b. How would your answer change if Petula used the cash method for extended warranties and
the purchasers paid $25,000 for the warranties that covered the second and third years of
ownership?
ANSWER:
a. Even though Petula’s business uses the accrual method, reserves for
estimated warranty expenses are not permitted. Therefore, the deduction for
warranty expenses is the amount paid of $40,000.
b. Petula would record gross income in 2019 of $425,000 ($400,000 + $25,000).
The deduction for warranty expense would still be $40,000.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 110Chapter 05: Business Deductions
158. Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft. One negotiation is with
a U.S. assistant secretary of defense. She can close the deal on the purchase of 50 attack helicopters if she is paid
$750,000 under the table. Another negotiation is with the minister of defense of a third world country. To complete
the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment. Beige makes
the payments and closes the deals. How much of these payments are deductible by Beige, Inc.?
ANSWER: The $750,000 payment to the U.S. assistant secretary of defense is a bribe and is not
deductible. If the grease payment of $1 million to the minister of defense of the third
world country does not violate the Foreign Corrupt Practices Act of 1977, then the
entire $1 million payment is deductible. However, if the grease payment does violate
the Act, then none of it is deductible.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 111Chapter 05: Business Deductions
159. Albie operates an illegal drug-running business and has the following items of income and expense. What is Albie’s
adjusted gross income from this operation?
Income $800,000
Expenses:
Rent 24,000
Utilities 9,000
Bribes to police 55,000
Medical expense 5,000
Legal fees 25,000
Depreciation 30,000
Illegal kickbacks 30,000
Cost of goods sold 300,000
ANSWER: Albie is allowed to reduce his AGI only by the cost of goods sold; thus, his AGI is
$500,000 ($800,000 – $300,000). Note that the cost of goods sold is treated as a
negative item in calculating gross income.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 112Chapter 05: Business Deductions
160. Kitty runs a brothel (illegal under state law) and has the following items of income and expense. What is the amount
that she must include in taxable income from her operation?
Income $200,000
Expenses:
Rent 8,000
Utilities 2,000
Bribes to police 10,000
Office supplies 5,000
Legal fees 20,000
Depreciation 14,000
Illegal kickbacks 15,000
ANSWER: Income $200,000
Expenses:
Rent $ 8,000
Utilities 2,000
Office supplies 5,000
Legal fees 20,000
Depreciation 14,000 (49,000)
$151,000
The bribes to police of $10,000 and illegal kickbacks of $15,000 are not deductible.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 113Chapter 05: Business Deductions
161. Janet is the CEO for Silver, Inc., a closely held corporation. Her total compensation for 2019 is $5 million. Of this
amount, $2 million is a salary and $3 million is a bonus. The bonus was calculated as 5% of Silver’s net income of
$60 million before the bonus and before taxes ($60 million × 5% = $3 million). The bonus provision has been in effect
since Janet became CEO five years ago and is related to Silver’s performance. It is approved annually by the entire
board of directors (one of the five directors is an outside director) of Silver. How much of Janet’s compensation can
Silver deduct for 2019?
ANSWER: All of the $5 million is deductible by Silver. Since Silver is a closely held, rather than
a publicly held corporation, the $1 million statutory limit on the deduction of certain
executive compensation is not applicable.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 114Chapter 05: Business Deductions
162. Agnes operates a Christmas shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose
of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In
addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the
amount of the expenses that Agnes can deduct if:
a. She opens a new shop in Vero Beach.
b. She decides not to open a new shop in Vero Beach.
ANSWER:
a. Because Agnes is already in the Christmas Shop business, $6,750 of the
investigation expenses [$1,500+($500 x 0.50)+$5,000=$6,750] is deductible
regardless of whether or not she opens a shop in Vero Beach. Note that, as
discussed in Chapter 9, only 50% of the cost of the meals is deductible.
b. Same response as in a.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 115Chapter 05: Business Deductions
163. While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on
the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees,
marketing survey, etc.) in exploring its business potential. Her parents have agreed to lend her the money required to
start the business. What amount of these investigation costs can Angel deduct if:
a. She opens the bookstore on August 1, 2019.
b. She decides not to open the bookstore.
ANSWER:
a. If Angel opens the bookstore on August 1, 2019, she can deduct the following
investigation expenses in 2019.
Allowed expense deduction in first year $5,000
Amortization ($37,800/180 months × 5 months) 1,050
Deductible investigation expenses $6,050
b. If Angel does not open the bookstore, she cannot deduct any of the $42,800 of
expenses she incurred since she is not already in the same or a similar
business.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 116Chapter 05: Business Deductions
164. Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother, Shirley, for
$160,000. Walter reinvests the proceeds in the stock market. Shirley holds the land for one year and a day and sells it
in the marketplace for $169,000.
a. Determine the tax consequences to Walter.
b. Determine the tax consequences to Shirley.
ANSWER: a. Amount realized $160,000
Adjusted basis (175,000)
Realized loss ($ 15,000)
Walter’s realized loss of $15,000 is disallowed because Walter and Shirley are
related parties.
b. Amount realized $169,000
Adjusted basis (160,000)
Realized gain $ 9,000
Walter’s disallowed loss needed to reduce Shirley’s gain
to zero (9,000)
Recognized gain $ –0–
Shirley may use as much of Walter’s disallowed loss as she needs to reduce her
realized gain (i.e., $9,000) to $0. Thus, Shirley’s recognized gain is $0 and the
$6,000 ($15,000 – $9,000) of Walter’s disallowed loss that is not used by Shirley
is permanently lost.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 117Chapter 05: Business Deductions
165. Sandra sold 500 shares of Wren Corporation to Bob, her brother, for its fair market value. She had paid $26,000 for
the stock. Calculate Sandra’s and Bob’s gain or loss under the following circumstances:
a. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $18,000.
b. Sandra sold the shares to Bob for $30,000. One year later, Bob sold them for $27,000.
c. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $28,000.
ANSWER:
a. Sandra has no deductible loss. The $6,000 realized loss is disallowed as a
related-party transaction. Bob’s recognized loss is $2,000.
b. Sandra has a recognized gain of $4,000. Bob has a recognized loss of $3,000.
Related-party transaction rules apply only to losses.
c. Sandra has no deductible loss. The $6,000 realized loss is disallowed as a
related-party transaction. Bob has a recognized gain of $2,000 ($28,000 –
$20,000 = $8,000 less Sandra’s disallowed loss of $6,000).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 118Chapter 05: Business Deductions
166. The stock of Eagle, Inc. is owned as follows:
Tom 23%
Tom’s uncle 22%
Tom’s daughter 7%
Tom’s sister 15%
Tom’s spouse 15%
Tom’s nephew 8%
Tom’s CPA, unrelated 10%
Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate
Tom’s realized and recognized loss associated with the sale.
ANSWER: Tom’s realized loss is $13,000.
Amount realized $212,000
Adjusted basis (225,000)
Realized loss ($ 13,000)
However, his recognized loss is $0 because the loss is disallowed as a § 267 related-
party transaction.
A related party includes a corporation more than 50% (directly or indirectly) owned
by the taxpayer. Tom’s total ownership (i.e., both direct and constructive) of Eagle,
Inc. is 60%.
Tom 23%
Tom’s daughter 7%
Tom’s sister 15%
Tom’s spouse 15%
60%
Tom’s uncle, nephew, and the CPA are not related parties for § 267 purposes.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 119Chapter 05: Business Deductions
167. Tracy invested in the following stocks and bonds during 2019.
Blue, Inc. $25,000
City of Falcon bonds 75,000
To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2019
was $5,000. During 2019, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on
the municipal bonds.
a. Determine the amount of Tracy’s gross income.
b. Determine the maximum amount of Tracy’s deductible interest expense.
ANSWER:
a. Tracy must include the $1,250 of dividend income in her gross income. The
interest on the municipal bonds of $3,000 is tax-exempt.
b. Tracy can deduct the interest paid of $1,250 ($5,000 × 1/4) on the portion of the
loan that relates to the Blue, Inc. stock. The interest paid of $3,750 on the
portion of the loan that relates to the municipal bonds is disallowed because the
interest income from the bonds is tax-exempt.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
168. In 2018, Robin Corporation incurred the following expenditures in connection with the development of a new product:
Salaries $100,000
Supplies 40,000
Market survey 10,000
Depreciation 25,000
In 2019, Robin incurred the following additional expenditures in connection with the development of the product:
Salaries $125,000
Supplies 50,000
Depreciation 30,000
Advertising 10,000Copyright Cengage Learning. Powered by Cognero. Page 120Chapter 05: Business Deductions
In October 2019, Robin began receiving benefits from the project. If Robin elects to expense research and
experimental expenditures, determine the amount and year of the deduction.
ANSWER: Deductibility of research and experimental expenditures is permitted in the year of
incurrence:
2018
Salaries $100,000
Supplies 40,000
Depreciation 25,000
Deductible expenses $165,000
The market survey is not a research and experimental expenditure.
2019
Salaries $125,000
Supplies 50,000
Depreciation 30,000
Deductible expenses $205,000
The advertising is not a research and experimental expenditure.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 121Chapter 05: Business Deductions
169. In 2019, Tan Corporation incurred the following expenditures in connection with the development of a new product:
Salaries $ 60,000
Supplies 20,000
Depreciation on research equipment 10,000
Testing for quality control 5,000
Advertising 8,000
Overhead allocated to research 2,000
Tan began selling the product in November 2019. If Tan elects to amortize research and experimental expenditures,
determine its deduction for 2019.
ANSWER: Salaries $60,000
Supplies 20,000
Depreciation 10,000
Overhead allocated to research 2,000
Total qualifying research expenditures $92,000
[($92,000/60 months) × 2 months] = $3,067
The testing for quality control and advertising are not a research and experimental
expenditures.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PM
170. During the current year, Gray Corporation, a C corporation in the financial services business, made charitable
contributions to qualified organizations as follows:
∙ Stock (basis of $20,000, fair market value of $45,000) in Drab Corporation, held for six
months as an investment, to the Salvation Army. (Salvation Army plans on selling the
stock.)
∙ Painting (basis of $90,000, fair market value of $250,000), held for four years as an
investment, to the Museum of Fine Arts. (The Museum plans on including the painting in
its collection.)Copyright Cengage Learning. Powered by Cognero. Page 122Chapter 05: Business Deductions
Gray Corporation’s taxable income (before any charitable contribution deduction) is $1.8 million.
a. What is the total amount of Gray’s charitable contributions for the year?
b. What is the amount of Gray’s charitable contribution deduction in the current year, and
what happens to any excess charitable contribution, if any?
ANSWER:
a. Gray’s total amount of charitable contributions is $270,000 [$20,000 (stock) +
$250,000 (painting)], computed as follows:
Stock: this is ordinary income property, because a sale of the stock would not
result in a long-term capital gain or a § 1231 gain for Gray (i.e., STCG). Thus,
the amount of the contribution is the stock’s basis, or $20,000.
Painting: this is capital gain property, because a sale of the painting would result
in a long-term capital gain for Gray. The painting is tangible personal property
and its use is related to the charitable organization’s exempt function. Thus, the
amount of the contribution is the painting’s fair market value, or $250,000.
b. Gray’s current-year charitable deduction is limited to $180,000 [10% × $1.8
million (taxable income before charitable deduction)], and the excess charitable
contribution of $90,000 ($270,000 – $180,000) is carried forward to the five
succeeding tax years.
POINTS: 1
DIFFICULTY: Challenging
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PM
171. On December 28, 2019, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation,
authorized a contribution of land to a qualified charitable organization. The land (basis of $75,000, fair market value
of $125,000) was acquired five years ago and held as an investment. For purposes of the taxable income limitation
applicable to charitable deductions, Taupe has taxable income of $800,000 and $950,000 for 2019 and 2020,
respectively. Describe the tax consequences to Taupe Corporation under the following independent situations.
a. The donation is made on February 15, 2020.Copyright Cengage Learning. Powered by Cognero. Page 123Chapter 05: Business Deductions
b. The donation is made on May 15, 2020.
ANSWER: In general, charitable contributions are deductible in the year made. However, in the
case of an accrual method corporation, a deduction can be claimed in the current
year for a charitable contribution made in the subsequent year if (1) the contribution
is approved by the board of directors of the corporation in the current year, and (2)
the contribution is made on or before the fifteenth day of the fourth month of the
subsequent year. The land is capital gain property; thus, the amount of the charitable
contribution is the land’s fair market value of $125,000.
a. The requirements for an accrual of the charitable deduction are satisfied; thus,
the $125,000 contribution is deductible by Taupe in 2019, subject to the taxable
income limitation. For 2019, the taxable income limitation for charitable
deductions is $80,000 (10% × $800,000). The excess contribution amount of
$45,000 carries forward to 2020 (five-year carryover limit).
b. The requirements for an accrual of the charitable deduction are not satisfied;
thus, the $125,000 contribution is deductible by Taupe in 2020 (the year the
contribution is made), subject to the taxable income limitation. For 2020, the
taxable income limitation for charitable deductions is $95,000 (10% ×
$950,000). The excess contribution amount of $30,000 carries forward to 2021
(five-year carryover limit).
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 124Chapter 05: Business Deductions
172. Tom purchased and placed in service used office furniture on January 3, 2019, for $40,000. Tom’s accountant
depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The
accountant used the same depreciation amounts when filing Tom’s income tax returns. On January 10, 2024, Tom
sold the furniture. Determine the tax basis of the furniture at the time of the sale.
ANSWER: The cost of the asset must be reduced by the greater of the cost recovery allowed or
allowable in calculating the tax basis.
Cost $40,000
2019 allowable ($40,000 × 0.1429) (5,716)
2020 allowable ($40,000 × 0.2449) (9,796)
2021 allowable ($40,000 × 0.1749) (6,996)
2022 allowable ($40,000 ×0 .1249) (4,996)
2023 allowed ($40,000 × 0.0893) (3,572)
2024 allowable ($40,000 × 0.0892 × 1/2) (1,784)
Tax basis $ 7,140
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 125Chapter 05: Business Deductions
173. Jenna acquires a new seven-year class asset on September 20, 2019, for $80,000. She placed the asset in service on
October 5, 2019. She does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. She
takes additional first-year depreciation. She sells the asset on August 25, 2020. This is the only asset she acquires in
2019. Determine Jenna’s cost recovery in 2019 and 2020.
ANSWER: Although the mid-quarter convention applies, Jenna can use bonus depreciation (and
escape the mid-quarter convention rules).
2019
Additional first-year depreciation ($80,000 × 100%) $80,000
MACRS cost recovery -0-
Total for 2019 $80,000
2020
MACRS cost recovery $ -0-
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 126Chapter 05: Business Deductions
174. Rod paid $1,950,000 for a new warehouse on April 14, 2019. He sold the warehouse on September 29, 2024.
Determine the cost recovery deduction for 2019 and 2024.
ANSWER: 2019: $1,950,000 × 0.01819 = $35,471.
2024: $1,950,000 × 0.02564 × 8.5/12 = $35,415.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 127Chapter 05: Business Deductions
175. Sid bought a new $1,320,000 seven-year class asset on August 2, 2019. On December 2, 2019, he purchased
$800,000 of used five-year class assets. If Sid elects § 179 and does not take additional first-year depreciation, what
is the maximum cost recovery deduction for these purchases for 2019?
ANSWER:
§ 179 expense $1,020,000
Taking § 179 expense on 7-year property
7-year property
§ 179 expense $1,020,000
MACRS cost recovery ($300,000 × 0.1429) 42,870
5-year property
MACRS cost recovery ($800,000 × 0.20) 160,000
Total deduction 1,222,870
Taking § 179 expense on 5-year property
7-year property
§ 179 expense ($1,020,000 – $800,000 expensed 5-year property) $ 220,000
MACRS cost recovery ($1,100,000 × 0.1429) 157,190
5-year property
§ 179 expense 800,000
Total deduction $1,177,190
Using § 179 on the 7-year asset produces the greater total deduction in 2019.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 128Chapter 05: Business Deductions
176. Polly purchased a new hotel on July 20, 2019, for $6,000,000. On January 20, 2026, the building was sold. Determine
the cost recovery deduction for the year of the sale.
ANSWER: $6,410 ($6,000,000 × 0.02564 × 0.5/12).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
177. Rustin bought 7-year class property on May 15, 2019, for $1,248,000. Rustin elects § 179 and straight-line cost
recovery, but not additional first-year depreciation.. Rustin’s taxable income would not create a limitation for
purposes of the § 179 deduction. Determine the maximum cost recovery deduction Rustin can claim for 2019.
ANSWER: § 179 expense election $1,020,000
Cost recovery [($1,248,000 – $1,020,000) × 0.0714
(Exhibit 8.5)] 16,279
Total deduction $1,036,279
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
178. Audra acquires the following new five-year class property in 2019:
Asset Acquisition Date CostCopyright Cengage Learning. Powered by Cognero. Page 129Chapter 05: Business Deductions
A January 10 $ 106,000
B July 5 70,000
C November 15 1,950,000
Total $ 2,126,000
Audra elects § 179 treatment for Asset C. Her taxable income from her business would not create a limitation for
purposes of the § 179 deduction. Audra does not claim any available additional first-year depreciation deduction.
Determine her total cost recovery deduction (including the § 179 deduction) for the year.
ANSWER: Audra’s § 179 deduction is $1,020,000 (she has placed no more than $2,550,000 of
assets in service during the year). Even with electing § 179 on Asset C, Audra has
placed more than 40% of assets in service during the last quarter of the year.
($930,000/$1,126,000=82.6%) Therefore, Audra must use the mid-quarter
convention.
Asset A
MACRS cost recovery ($106,000 × 0.35) 37,100
Asset B
MACRS cost recovery ($70,000 × 0.15) 10,500
Asset C
§ 179 expense 1,020,000
MACRS cost recovery ($930,000 × 0.05) 46,500
Total deduction $1,114,100
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 130Chapter 05: Business Deductions
179. On April 5, 2019, Orange Corporation purchased and placed in service 7-year class assets costing $1,050,000 and 5-
year class assets costing $140,000. Orange elects to expense the maximum amount under § 179. Orange does not
take additional first-year depreciation. Assume taxable income is not a limitation. Determine Orange’s maximum cost
recovery with respect to the assets for 2019.
ANSWER: § 179 limit $1,020,000
7-year assets § 179 expense $1,020,000
Regular MACRS [($1,050,000 –
$1,020,000) × 0.1429] 4,287
5-year assets Regular MACRS ($140,000 × 0.20) 28,000
Total cost recovery $1,052,287
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
180. Martin is a sole proprietor of a sandwich business. On March 4, 2019, he purchased and placed in service new
seven-year class assets costing $580,000. Martin’s business reports taxable income of $160,000 for the year before
any deductions associated with the purchased assets. Martin also received $30,000 of interest income for the year,
which is not related to the business. Martin wants his adjusted gross income for the year to be as low as possible.
With this objective in mind, determine how Martin should recover the cost of the acquired assets.
ANSWER:
Electing § 179
§ 179 expense (limited to $1,020,000) $580,000
Business income before MACRS deductions $160,000
Additional first-year depreciation
[($580,000 – $1,000,000) × 100%] (-0-)
MACRS cost recovery [(580,000 – $580,000) × 0.1429)] (-0-)Copyright Cengage Learning. Powered by Cognero. Page 131Chapter 05: Business Deductions
Business income limitation $160,000
§ 179 Limit $160,000
Business income $ –0–
Interest income 30,000
Adjusted gross income $ 30,000
Not Electing § 179
Business income before MACRS deductions $160,000
Additional first-year depreciation ($580,000 × 100%) (580,000)
MACRS cost recovery ($-0- × 0.1429) (-0-)
Business income ($420,000)
Interest income 30,000
Adjusted gross income ($390,000)
Not electing § 179 will produce the lowest adjusted gross income, because the § 179
expense cannot create a business loss.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 132Chapter 05: Business Deductions
181. On August 20, 2019, May placed in service a building for her business. On November 28, 2019, she paid $80,000 for
improvements to the building. What is May’s cost recovery deduction for the building improvements in 2019?
ANSWER:
MACRS cost recovery [39-year real property; month 11
($80,000 × 0.00321)] $ 257
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
182. On July 15, 2019, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the
maximum total cost recovery from the improvements in 2019.
ANSWER:
Regular MACRS [39-year real property; month 7
($275,000 × 0.01177)] $ 3,237
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 133Chapter 05: Business Deductions
183. Nora purchased a new automobile on July 20, 2018, for $29,000. The car was used 60% for business and 40% for
personal use. In 2019, the car was used 30% for business and 70% for personal use. Nora elects not to take
additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction for 2019.
ANSWER: Cost Recovery in 2018
MACRS ($29,000 × 0.20) = $5,800 (limited to $10,000*);
$5,800 × 60% $3,480
Straight-line ($29,000 × 0.10) = $2,900 (limited to $10,000*);
$2,900 × 60% (1,740)
Cost recovery recapture in 2018 $1,740
Cost Recovery in 2019
Straight-line ($29,000 ×0 .20) = $5,800 (limited to $16,000*);
$5,800 × 0.30 $1,740
*These depreciation limits are indexed annually.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 134Chapter 05: Business Deductions
184. Norm purchases a new SUV on October 12, 2019, for $60,000. The SUV has a gross vehicle weight of 6,200 lbs. It
is used 100% of the time for business and it is the only business asset acquired by Norm during 2019. Compute the
maximum deduction with respect to the SUV for 2019. Norm does not take additional first-year depreciation.
ANSWER: The SUV is not classified as a passenger automobile because of its GVW exceeding
6,000 lbs. Therefore, it is not subject to the cost recovery limits of § 280F.
Section 179 expense $25,500
MACRS cost recovery [($60,000 – $25,500) × 0.05] 1,725
Note: The mid-quarter convention applies
Total deduction $27,225
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 135Chapter 05: Business Deductions
185. On June 1, 2019, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000. She
used the assets 40% for business, 50% for the production of income, and 10% for personal use. These are the only
assets Gabriella purchased during the current year. Determine her total cost recovery deduction for 2019.
ANSWER: Starting in 2018, a computer and peripheral equipment are not listed property. As a
result, Gabriella can elect § 179 expensing, or bonus depreciation on the 90%
business and production of income use. So Gabriella can deduct $22,500 ($25,000 x
90%).
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 136Chapter 05: Business Deductions
186. In 2019, Marci is considering starting a new business. Marci incurs the following costs associated with this venture.
Advertising $ 5,000
Travel 10,000
Market surveys 8,000
Professional services 30,000
Interest expense 2,000
Taxes 1,000
Marci started the new business on January 5, 2020. Determine the deduction for her startup costs for 2019.
ANSWER: Marci is not allowed to deduct any startup costs in 2019 because the business was
not started until 2020.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 137Chapter 05: Business Deductions
187. Lindsey purchased a uranium interest for $10,000,000 on January 3, 2019, when recoverable reserves were
estimated at 200,000 units. A total of 10,000 units were extracted in 2019 and 7,000 units were sold in 2019. Gross
income from the property was $2,800,000 and taxable income without the allowance for depletion was $1,000,000.
Determine her depletion deduction for 2019.
ANSWER: Cost Depletion
Percentage Depletion
Lesser of:
22% × $2,800,000 = $616,000
50% × $1,000,000 = $500,000
Therefore the depletion deduction would be $500,000.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Subjective Short Answer
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-10 – LO: 5-10
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 138Chapter 05: Business Deductions
Essay
188. Under what circumstance can a bribe be deducted?
ANSWER: Bribes paid to a domestic official are disallowed if the bribe is illegal under the laws
of the United States. However, a bribe paid to a foreign official is disallowed only if
it is unlawful under the Foreign Corrupt Practices Act of 1977.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
189. Can a trade or business expense be deductible if it is necessary but not ordinary?
ANSWER: No. To be deductible as a trade or business expense, the expense must be both
ordinary and necessary.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 139Chapter 05: Business Deductions
190. Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other
requirement? What are the tax consequences if this requirement is not met?
ANSWER: “Reasonableness” is an additional requirement that applies to salaries. Generally, the
unreasonable portion of the salary expense is disallowed as a deduction to the
corporation and taxable as a dividend, rather than as salary, to the shareholder.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 140Chapter 05: Business Deductions
191. If part of a shareholder/employee’s salary is classified as unreasonable, determine the effect on the:
a. Shareholder/employee’s gross income.
b. Corporation’s taxable income.
ANSWER:
a. The reclassification of part of a shareholder/employee’s salary as unreasonable
will have no effect on the shareholder/employee’s gross income. That is, the
shareholder/employee’s salary income will decrease by the same amount as his
or her dividend income increases. Note that if the dividends are qualified
dividends, they are eligible for the same preferential tax rate of 20%/15%/0%
applicable to long-term capital gains.
b. Salaries are deductible in calculating corporate taxable income, whereas
dividends are not. So, the taxable income of the corporation will increase due to
a reduced salary deduction.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-01 – LO: 5-01
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
192. Bruce owns several sole proprietorships. Must he use the same accounting method for each of these businesses?
ANSWER: No. If a taxpayer owns multiple businesses, it may be possible to use the cash
method for some and the accrual method for others.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 141Chapter 05: Business Deductions
193. Max opened his dental practice (a sole proprietorship) in March 2019. At the end of the year, he has unpaid accounts
receivable of $62,000 and no unpaid accounts payable. Should Max use the accrual method or the cash method for
his dental practice?
ANSWER: A service provider generally should use the cash method. Under the cash method,
Max records income from his dental practice only as he collects from his patients
and/or their insurance companies. Max has income from the uncollected accounts
receivable only as he receives payment. Note that since his accounts payable can be
deducted only when paid under the cash method, he should continue to minimize the
accounts payable balance at the end of the tax year.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
194. Discuss the application of the “one-year rule” on prepayments by a cash basis taxpayer.
ANSWER: The Regulations set forth the general rule that an expenditure that creates an asset
having a useful life that extends substantially beyond the end of the tax year must be
capitalized. However, under the “one-year rule” on prepayments for cash basis
taxpayers, the prepayment can be expensed in the current tax year if the asset will
expire or be consumed by the end of the tax year following the year of payment.
Otherwise, the taxpayer must capitalize the prepayment and deduct it over the
benefit period.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 142Chapter 05: Business Deductions
195. Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.
ANSWER: The two tests that an accrual basis taxpayer must apply before an expense can be
deducted are (1) the all events test and (2) the economic performance test. The all
events test provides that a deduction cannot be claimed until all the events that
create the taxpayer’s liability have occurred and that the amount of the liability can
be determined with reasonable accuracy. The economic performance test provides
that the service, property, or use of property giving rise to the liability must have been
performed for, provided to, or used by the taxpayer.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-02 – LO: 5-02
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
196. Graham, a CPA, has submitted a proposal to do the annual audit for a municipality. Owen, the city treasurer, tells
Graham that for a $1,000 fee, he will use his influence to have the audit awarded to Graham. What factors are
relevant in determining whether Graham can deduct the $1,000 payment assuming he pays the fee to Owen?
ANSWER: The payment from Graham to Owen appears to be a bribe. To be disallowed, the
bribe must be illegal under either Federal or state law and also must subject the
payer to a criminal penalty or the loss of license or privilege to engage in a trade or
business. For a bribe that is illegal under state law, a deduction is denied only if the
state law is generally enforced.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 143Chapter 05: Business Deductions
197. If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses
are disallowed?
ANSWER: The usual expenses of operating a business are deductible. However, the following
expenses are disallowed.
∙ Fines
∙ Bribes to public officials
∙ Illegal kickbacks
∙ Other illegal payments∙ Other illegal payments
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 144Chapter 05: Business Deductions
198. Bobby operates a drug-trafficking business. Because he has an accounting background, he keeps detailed financial
records. What expenses can Bobby deduct on his Federal income tax return?
ANSWER: Bobby cannot deduct any of the expenses associated with operating his illegal drug-
trafficking business. However, gross income for tax purposes is defined as sales
minus cost of goods sold. So in calculating the net income of the business for tax
purposes, cost of goods sold is treated as a negative income item rather than as an
expense.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
199. Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the
Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct
these political contributions?
ANSWER: No. Political contributions cannot be deducted.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
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200. In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction
limit? What executives are covered?
ANSWER: The $1 million limit on deducting the compensation of a covered executive applies to
corporations that have at least one class of stock registered under the Securities
Exchange Act of 1934. Covered employees include the chief (or principal) executive
officer, the chief (or principal) financial officer, and the three other most highly
compensated officers.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
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201. Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1)
the business is not acquired or (2) the business is acquired?
ANSWER:
(1) The expenses of investigation may be deducted if the taxpayer is in the same
or similar business to that being investigated, even if the business is not
acquired. If the taxpayer is not in the same or similar trade or business to the
one being investigated, the investigation expenses are nondeductible if the
business is not acquired.
(2) The expenses of investigation must be capitalized by a taxpayer not in a
similar business when the business is acquired. Such expenses may be
immediately expensed (up to $5,000 if such expenses do not exceed $50,000)
and the balance amortized over a 180-month minimum period. If the taxpayer
is in the same or similar trade or business as that acquired, investigation
expenses are currently deductible.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
202. Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?
ANSWER: Sham transactions can be structured between related parties such that no real
economic change occurs in the status of the parties, but a tax savings results. This is
an abuse of the tax law that has resulted in restrictions on the recognition of such
transactions.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
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203. In a related-party transaction where realized loss is disallowed, when can the disallowed loss be used by the buyer
on the subsequent sale of the property? In the case of a related-party disallowed loss transaction, can the related-
party seller’s disallowed loss be used by a taxpayer other than the related-party buyer?
ANSWER: The related-party buyer is permitted to use as much of the disallowed loss of the
seller as is needed to reduce any realized gain on the subsequent sale of the
property. If the property in the hands of the buyer appreciates to at least the amount
of the seller’s adjusted basis at the date of the original sale, all of the disallowed loss
can be used by the buyer on the subsequent sale. The related-party seller’s
disallowed loss can be used only by the related-party buyer.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 148Chapter 05: Business Deductions
204. Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are
brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To
provide Olive with funds to acquire additional working capital, each shareholder lends Olive $100,000 with a 6%
interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. Olive
pays the $3,000 to each shareholder early next year. From a timing perspective, when should Olive deduct this
$6,000 and when should Maurice and Alex include the $3,000 in gross income?
ANSWER: Maurice and Alex are related parties with Olive. So Olive (accrual method) must
claim the deduction of $6,000 in the same tax year that the cash method
shareholders include the $3,000 each in gross income (next year). Note that this
matching provision applies only if the payor uses the accrual method and the payee
uses the cash method.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:00 PM
DATE MODIFIED: 3/11/2019 4:05 PM
205. Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.
ANSWER: Because the interest income on municipal bonds is excludible from gross income, the
related expense should not be deductible. Otherwise, a taxpayer could borrow
money, at say 10%, invest the funds in tax-exempt securities, at say 8%, and realize
a profit if the interest expense were deductible. The entire profit would be derived
from the tax treatment.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
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206. What are the three methods of handling research and experimental expenditures incurred in a trade or business?
Under what circumstances would you choose each?
ANSWER: The following methods are permitted:
∙ The expense method, in which the expenditures are written off immediately is
attractive when the taxpayer is currently in a high tax bracket and has sufficient
other income to offset the deductions. This method will not be available in taxable
years beginning after December 31, 2021.
∙ Deferral and amortization of expenditures over a period of not less than 60
months is generally chosen when the total deduction is not wanted immediately
because future income is expected to be available to offset the deduction.
∙ The capitalization method allows no deduction until the project is abandoned or
becomes worthless. Usually taxpayers do not choose this method, since the tax
benefit is deferred for an indefinite period.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-04 – LO: 5-04
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:01 PM
DATE MODIFIED: 3/11/2019 4:05 PM
207. Briefly describe the charitable contribution deduction rules applicable to C corporations.
ANSWER: Tax year of deduction: In general, a charitable contribution is deductible only in the
year the gift is made. For an accrual basis corporation, however, a charitable
contribution can be deducted in the current year for a contribution that is (1)
approved by the corporation’s board of directors by the end of such year and (2)
paid on or before the fifteenth day of the fourth month of the next year.
Amount of contribution: In addition to cash gifts, property contributions to qualified
charitable organizations are also deductible. For property that is depreciated (fair
market value less than basis), the amount of the contribution is the property’s fair
market value. For property that is appreciated (fair market value greater than basis),
the amount of the contribution depends on whether the property is “capital gain
property” or “ordinary income property.” Capital gain property is property that, if
sold, would result in a long-term capital gain or § 1231 gain. A contribution of capital
gain property generally results in a deductible amount equal to the property’s fair
market value. If the capital gain property is tangible personal property and theCopyright Cengage Learning. Powered by Cognero. Page 150Chapter 05: Business Deductions
charitable organization’s use of the property is unrelated to its exempt function, the
amount of the contribution is equal to the property’s basis. (Contributions of capital
gain property to certain private foundations are similarly limited to the property’s
basis.) Ordinary income property is property that, if sold, would not result in a long-
term capital gain or § 1231 gain. Typically, the deduction for a contribution of
ordinary income property is equal to the property’s basis. However, charitable
contributions of certain inventory property by corporations can result in an enhanced
deduction amount. For such inventory property, the deductible amount is equal to the
lesser of (1) the sum of the property’s basis plus 50% of the appreciation on the
property or (2) twice the property’s basis.
Annual limitation on deduction: A corporate taxpayer’s charitable deduction is limited
to 10% of taxable income (determined without regard to the charitable contribution
deduction, any net operating loss carryback or capital loss carryback, and dividends
received deduction). Any contributions in excess of the 10% limitation may be
carried forward for five years. In any tax year for which there is a charitable
contribution carryover, current year’s gifts are applied against the 10% limitation
first, with carryover amounts deducted in order of time.
POINTS: 1
DIFFICULTY: Moderate
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-06 – LO: 5-06
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:07 PM
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208. In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction
limit? What executives are covered? What compensation is included in the limit?
ANSWER: The $1 million limit on deducting the compensation of a covered employee applies to
publicly traded corporations. Covered employees include the principal (or chief)
executive officer, the principal (or chief) financial officer, and the three other most
highly compensated officers. The limitation applies to all compensation for services
performed by a covered employee, including commissions and performance-based
compensation. However, the limitation does not apply to retirement plan
contributions or tax-free employer provided benefits.
POINTS: 1
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Application | Bloom’s: Knowledge
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:07 PM
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209. How is the limitation on the deduction of business interest computed? Does it apply to all taxpayers? What happens
to any business interest deduction disallowed by the limitation?
ANSWER: The deduction of business interest for any year is limited to the sum of (1) the
taxpayer’s business interest income for the year, (2) 30% of the taxpayer’s adjusted
taxable income for the year, and (3) the taxpayer’s floor plan financing interest for
the year. In general, the limitation applies to all taxpayers but there is a small
business exception (i.e., taxpayers having average gross receipts for the prior three-
year period of $25 million or less). Any business interest deduction disallowed by the
limit is treated as business interest paid or accrued in the succeeding tax year.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: CPET.SWFT.2020.LO: 5-03 – LO: 5-03
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:07 PM
DATE MODIFIED: 3/11/2019 4:05 PM
210. Discuss the difference between the half-year convention and the mid-quarter convention.
ANSWER: The half-year convention assumes property is placed in service at mid-year and thus
provides for a half-year’s cost recovery for that year. The mid-quarter convention
assumes property placed in service during the year is placed in service at the middle
of the quarter in which it is actually placed in service.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
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211. Discuss the criteria used to determine whether a building is residential or nonresidential realty. Also explain the tax
consequences resulting from this determination.
ANSWER: Residential realty is property for which 80% or more of the gross rental revenues
are from nontransient dwelling units. Residential realty has a recovery period of 27.5
years. Nonresidential realty has a recovery period of 39 years.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
212. Discuss the tax consequences of listed property being used for the production of income compared to being used in a
trade or business.
ANSWER: Section 179 expensing cannot be taken on property used for the production of
income. However, additional first-year depreciation can be taken.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
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213. Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
ANSWER: If an automobile is not classified as a passenger automobile, it is not subject to the
statutory dollar cost recovery limits under § 280F. In addition to a larger cost
recovery deduction each year, it also results in the total recovery of the cost over a
six-year period. While the automobile is still listed property, if it passes the more-
than-50% business use test, MACRS cost recovery can be used as well as an
election under § 179. However, the § 179 limit for SUVs is $25,500 rather than
$1,020,000 in 2019. The SUV also is eligible for additional first-year depreciation.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-07 – LO: 5-07
EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PM
214. Discuss the reason for the inclusion amount with respect to leased automobiles.
ANSWER: The purpose of the inclusion amount is to prevent taxpayers from circumventing the
cost recovery dollar limitations by leasing instead of purchasing an automobile.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-08 – LO: 5-08
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
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215. Discuss the requirements for startup expenditures to be amortized under § 195.
ANSWER: The expenditures must meet two requirements. First, the expenditures must be paid
or incurred in connection with:
∙ Creating an active trade or business.
∙ Investigating the creation or acquisition of an active trade or business.
or
∙
Anticipating an activity becoming a business.
Second, the expenses must reflect those that could be deducted in an existing trade
or business in the same field.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 10 min.
DATE CREATED: 3/11/2019 2:04 PM
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216. Discuss the tax implications of a seller allocating the selling price to goodwill or a covenant not to compete.
ANSWER: Goodwill is a capital asset and any gain or loss recognized on the sale of the goodwill
will be capital gain or loss. A covenant not to compete is a business asset and any
gain or loss will be ordinary gain or loss.
POINTS: 1
DIFFICULTY: Easy
QUESTION TYPE: Essay
HAS VARIABLES: False
STUDENT ENTRY MODE: Basic
LEARNING OBJECTIVES: EOTX.SWFT.2020.LO: 5-09 – LO: 5-09
NATIONAL STANDARDS: United States – BUSPROG: Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.
DATE CREATED: 3/11/2019 2:04 PM
DATE MODIFIED: 3/11/2019 4:05 PMCopyright Cengage Learning. Powered by Cognero. Page 157Chapter 05: Business Deductions