Federal Tax Exam 3 UPDATED ACTUAL
Exam Questions and CORRECT Answers
Section 162 - CORRECT ANSWER - - all ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business
ex: what is paid by check, cash, or credit card
Ordinary - CORRECT ANSWER - normal, usual, and customary for the business
- doesn't have to be frequent/often but it makes sense to incur the expense
Necessary - CORRECT ANSWER - appropriate and helpful in developing a tax payer is
business
Reasonable - CORRECT ANSWER - consider is it paid by tax payer to an independent party
Compensation - CORRECT ANSWER - - unreasonable amounts of compensation disallowed
- performance based compensation
280G - CORRECT ANSWER - - golden parachute payment
- when you are fired/leave they give you benefits and stock etc
Limitations on business expense - CORRECT ANSWER - 1. expenses against public policy
- no deduction for fines, lobby, expenditures, or political contributors
2. expenses relating to tax exempt income
,3. capital expenditures
4. personal expenditures
Inherently Personal - CORRECT ANSWER - basic needs of food, clothing, shelter, etc
- gets no deduction
Excess Cost - CORRECT ANSWER - - business portion only deductible
Allocation - CORRECT ANSWER - half business deductible half personal is not deductible
Primary Purpose - CORRECT ANSWER - full deduction for business expenses
Travel - CORRECT ANSWER - - away from home, overnight
- transportation, lodging, 50% meals
- foreign travel limited
Entertainment expenses - CORRECT ANSWER - directly related to business
- associated with business so could have business before/after and then talking business
Mixed motive expenditures - CORRECT ANSWER - - special limits are imposed on
expenditures that have both personal and business benefits
- only 50% of business meals and entertainment are deductible
- contemporaneous written records of business purpose is required
, Domestic production activities deduction - CORRECT ANSWER - - a subsidy for the cost of
producing goods or certain construction services within the US
- 9% of qualified production activities income
- limited to overall income (AGI for individuals) and 50% of wages associated with the
production
Calendar year - CORRECT ANSWER - ends december 31
Fiscal year - CORRECT ANSWER - ends on the last day of a month other then december
52/53 week year - CORRECT ANSWER - could end on the same day of the week that is the
last such day in the month
Flow through entity - CORRECT ANSWER - - legal entities like partnerships, limited liability
companies, and S corp tax do not pay income tax, income and losses from flow through entities
are allocated to their owners
- partnerships and S corps are flow through entities and they generally must adopt tax years
consistent with the owners tax years
Sole Proprietorships - CORRECT ANSWER - because individual proprietors must report their
business income on their individual returns, proprietorships use a calendar year end to report
their business income
C Corp - CORRECT ANSWER - generally allowed to select a calendar, fiscal, or 52/53 week
year end
Exam Questions and CORRECT Answers
Section 162 - CORRECT ANSWER - - all ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business
ex: what is paid by check, cash, or credit card
Ordinary - CORRECT ANSWER - normal, usual, and customary for the business
- doesn't have to be frequent/often but it makes sense to incur the expense
Necessary - CORRECT ANSWER - appropriate and helpful in developing a tax payer is
business
Reasonable - CORRECT ANSWER - consider is it paid by tax payer to an independent party
Compensation - CORRECT ANSWER - - unreasonable amounts of compensation disallowed
- performance based compensation
280G - CORRECT ANSWER - - golden parachute payment
- when you are fired/leave they give you benefits and stock etc
Limitations on business expense - CORRECT ANSWER - 1. expenses against public policy
- no deduction for fines, lobby, expenditures, or political contributors
2. expenses relating to tax exempt income
,3. capital expenditures
4. personal expenditures
Inherently Personal - CORRECT ANSWER - basic needs of food, clothing, shelter, etc
- gets no deduction
Excess Cost - CORRECT ANSWER - - business portion only deductible
Allocation - CORRECT ANSWER - half business deductible half personal is not deductible
Primary Purpose - CORRECT ANSWER - full deduction for business expenses
Travel - CORRECT ANSWER - - away from home, overnight
- transportation, lodging, 50% meals
- foreign travel limited
Entertainment expenses - CORRECT ANSWER - directly related to business
- associated with business so could have business before/after and then talking business
Mixed motive expenditures - CORRECT ANSWER - - special limits are imposed on
expenditures that have both personal and business benefits
- only 50% of business meals and entertainment are deductible
- contemporaneous written records of business purpose is required
, Domestic production activities deduction - CORRECT ANSWER - - a subsidy for the cost of
producing goods or certain construction services within the US
- 9% of qualified production activities income
- limited to overall income (AGI for individuals) and 50% of wages associated with the
production
Calendar year - CORRECT ANSWER - ends december 31
Fiscal year - CORRECT ANSWER - ends on the last day of a month other then december
52/53 week year - CORRECT ANSWER - could end on the same day of the week that is the
last such day in the month
Flow through entity - CORRECT ANSWER - - legal entities like partnerships, limited liability
companies, and S corp tax do not pay income tax, income and losses from flow through entities
are allocated to their owners
- partnerships and S corps are flow through entities and they generally must adopt tax years
consistent with the owners tax years
Sole Proprietorships - CORRECT ANSWER - because individual proprietors must report their
business income on their individual returns, proprietorships use a calendar year end to report
their business income
C Corp - CORRECT ANSWER - generally allowed to select a calendar, fiscal, or 52/53 week
year end
