Business Income & Expense
What is the IRS requirement for a business expense to be deductible?
Must be ordinary and necessary
You incurred $17,000 in organization costs on your new coffee shop. How much can you immediately deduct in your first year?
$5,000
You rent your apartment during spring break for $2,000 and head home. You spent $350 getting it cleaned in preparation. How much rental income will you recognize? How much for AGI deductions wil you get?
0 and 0 because it was less than 15 days
When do you adopt an overall accounting method?
On your first return
You pay the next 12 months of rent on June 1st. Under the accrual method, how many months can you deduct in the current year? Under the cash method?
accrual: 7 months
cash: all 12 months
How much can you deduct under section 179 this year?
1,220,000
In what order do you deduct rental expense?
Tier 1: Property taxes and mortgage interest
Tier 2: other expenses except depreciation
Tier 3: depreciation
When is an impermissible accounting method adopted?
After you use it for 2 years
You provide surfing lessons and are paid $3,600 for the next 18 months of lessons beginning August 1st of this year. Under the cash method how much must you recognize the next three tax years? Under the accrual method?
Cash: $3,600;
Accrual: 1,000 this year; and 2,600 next
Which of the following assets qualify for section 179?
- equipment
- land
- machinery
- new truck
- building
yes
no
yes
yes
no
How many days a year do you need to personally use a home for it to count as a residence with minimal rental use?
The greater of more than 14 days or 10% of your rental days.
How do you cost recover the following assets:
building - depreciation
tree farm - depletion
patent - amortization
land - you don't
Which of the following items would you include as income in the current year under the cash method?
yes
no
yes
yes
You place a $2m personal asset into service that has a 5-year life. What is your total current year depreciation expense if you elect section 179 but not bonus?
(2,000,000 - 1,220,000) = 780,000 * 20% = 156,000 + 1,220,000 = 1,376,000
Which of the following residences qualify for a property tax deduction?
yes
yes (the portion you use personally)
no (not even if you use it personally)
What is the depreciation convention for the following asset:
building - mid month
tree farm - not applicable
patent - full month
equipment - half year
Are the following expenses deductible?
no
no
no
You paid $500,000 for extraction rights of oil for the next 5 years. You expect to extract 5million gallons. In the current year you extract 500k gallons. How much cost depletion do you have?
$500,000/5,000,000*500,000 = $50k
You own a vacation property. What is your net rental income if you have $5,000 in rental income and you allocated $2,500 of property taxes and mortgage interest, $2,000 of other expenses and $1,000 of depreciation?
0 rental income; $500 of depreciation carried over to next year
Are the following days personal or rental use days?
personal
personal
rental
neither