Business Income, Deductions, and Accounting Methods
In-Class Homework Solutions
[LO 1] Manny hired his brother’s firm to provide accounting services to his business. During the current year, Manny paid his brother’s firm $82,000 for services even though other firms were willing to provide the same services for $40,000. How much of this expenditure, if any, is deductible as an ordinary and necessary business expenditure?
Only reasonable amounts of compensation are deductible ($40,000), and the remainder would be reclassified probably as a gift to his brother. 46.
[LO 1, 2] Indicate the amount (if any) that Michael can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution. a.
From time to time, Michael rents a dump truck for his business. While hauling gravel to a job site, Michael was stopped for speeding. He paid a fine of $125 for speeding and a fine of $80 for carrying an overweight load. b.
Michael paid a part-time employee $750 to drive his rented dump truck. Michael reimbursed the employee $35 for gasoline for the truck. c.
Michael gave a member of the city council a new watch, which cost $200. He hopes that the city councilman will “throw” some contracts to his business. a.
No deduction for fines.
No deduction for bribes (against public policy).
[LO 1, 2] Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following expenditures and explain your solution. a.
Josh borrowed $50,000 from the First State Bank using his business assets as collateral. He used the money to buy City of Blanksville bonds. Over the course of a year, Josh paid interest of $4,200 on the borrowed funds, but he received $3,500 of interest on the bonds. b.
Josh purchased a piece of land for $45,000 in order to get a location to expand his business. He also paid $3,200 to construct a new driveway for access to the property. c.
This year Josh paid $15,000 to employ the mayor’s son in the business. Josh would typically pay an employee with these responsibilities about $10,000 but the mayor assured Josh that after his son was hired, some city business would be coming his way. d.
Josh paid his brother, a mechanic, $3,000 to install a robotic machine for Josh’s business. The amount he paid to his brother is comparable to what he would have paid to an unrelated party to do the same work. Once the installation was completed by his brother, Josh began calibrating the machine for operation. However, by the end of the year, he had not started using the machine in his business. a.
$0. The interest expense is not deductible (expense associated with tax-exempt income). b.
$0. Capital expenditures are not deductible.
Only $10,000 is deductible and the remaining $5,000 is either unreasonable in amount or against public policy (as a bribe). d.
$0. The amount paid to install a machine is capitalized because the cost benefits the useful life of the machine.
[LO 2] Ralph invited a potential client to dinner and the theatre. Ralph paid $250 for the dinner and $220 for the theatre tickets in advance. They first went to dinner and then they went to the theatre. a.
What amount can Ralph deduct if, prior to the dinner, he met with the potential client to discuss future business prospects? b.
What amount can Ralph deduct if he and the client only discussed business during the course of the dinner? c.
What amount can Ralph deduct if he and the potential client tried to discuss business during the course of the theatre performance but did not discuss business at any other time? d.
What amount can Ralph deduct if the potential client declined Ralph’s invitation, so Ralph took his accountant to dinner and the theatre to reward his accountant for a hard day at work? At dinner, they discussed the accountant’s workload and upcoming assignments. a.
$235 (50% of...
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