Federal Taxation - Exam 2 UPDATED
Exam Questions and CORRECT Answers
Other terms for self-employed taxpayer are: - CORRECT ANSWER - Independent contractor,
entrepreneur or proprietor
Self employed taxpayers report their profit/loss on: - CORRECT ANSWER - Sch C or Sch F
for farmers
If a business has inventory, what method will they use? - CORRECT ANSWER - Accrual
method (basis)
What accounting method is most commonly used? - CORRECT ANSWER - Cash method
(basis)
Accrual basis is required if average gross receipts are more than..? - CORRECT ANSWER -
was 26M---> now 30M
Cash method (basis): - CORRECT ANSWER - Generally when paid (cash moves)
ex. Cash payments, credit card payments, payments made with a signed note
May use Accrual Method (basis) if: - CORRECT ANSWER - sells products, inventory based,
required to use if average gross receipts > $30M (2023)
If you switch between methods, you have to wait ____ to request to change again. - CORRECT
ANSWER - 5 years
Accrual method- all events test: - CORRECT ANSWER - Everything necessary to establish
legal liability has occurred. Amount can be determined.
,Accrual Method- Economic Performance Test - CORRECT ANSWER - Party legally required
to perform/ provide has done so.
aka: When the revenues are earned and expenses are incurred.
Expenses are: - CORRECT ANSWER - Not deductible unless the tax law says they are
Something has to be _____, _______, and ______ to be deductible - CORRECT ANSWER -
Ordinary, necessary, and reasonable
Requirements for deductible business expenses:
Ordinary - CORRECT ANSWER - Normal, usual or customary for the business type
Ordinary is different depending on: - CORRECT ANSWER - The type of business.
Ex. an office has computers, desks, etc
A salon has shampoo, scissors, blowdryers, etc.
What is "normal"/ordinary varies by business
Requirements for deductible business expenses:
Necessary - CORRECT ANSWER - Appropriate and helpful in taxpayer's business
ex. A computer is helpful but not NEEDED or else business will fail
Requirements for deductible business expense:
Reasonable in amount - CORRECT ANSWER - Fair, equitable, justifiable based upon facts
and circumstances
(small banks vs national bank)
Common business deductions: - CORRECT ANSWER - Advertising
Bad Debt
, Commissions & Fees
Depreciation & Amortization
Insurance
Interest
Professional Fees
Taxes & Licenses
Supplies
Salaries & Wages
Office Expense & Postage
Payroll Taxes
Employee Benefit Programs
Pension & Profit-Sharing Plans
Rents
Repairs & Maintenance
Travel
Utilities
Non deductible expenses: - CORRECT ANSWER - Federal Income Tax
Personal Expenses
Social Club Dues (lake club, etc)
Entertainment Expenses
Political & Lobbying Expenses (if you're paying to lobby, non-deductible)
Bribes & Kickbacks
Fines & Penalties due to Law Violations (trucking companies probably have many speeding
tickets but they are not deductible)
Clothing that can be worn "every day" (things that are not a uniform)
Expenses related to Tax Exempt Income (if income isn't taxable--->related expenses aren't)
Exam Questions and CORRECT Answers
Other terms for self-employed taxpayer are: - CORRECT ANSWER - Independent contractor,
entrepreneur or proprietor
Self employed taxpayers report their profit/loss on: - CORRECT ANSWER - Sch C or Sch F
for farmers
If a business has inventory, what method will they use? - CORRECT ANSWER - Accrual
method (basis)
What accounting method is most commonly used? - CORRECT ANSWER - Cash method
(basis)
Accrual basis is required if average gross receipts are more than..? - CORRECT ANSWER -
was 26M---> now 30M
Cash method (basis): - CORRECT ANSWER - Generally when paid (cash moves)
ex. Cash payments, credit card payments, payments made with a signed note
May use Accrual Method (basis) if: - CORRECT ANSWER - sells products, inventory based,
required to use if average gross receipts > $30M (2023)
If you switch between methods, you have to wait ____ to request to change again. - CORRECT
ANSWER - 5 years
Accrual method- all events test: - CORRECT ANSWER - Everything necessary to establish
legal liability has occurred. Amount can be determined.
,Accrual Method- Economic Performance Test - CORRECT ANSWER - Party legally required
to perform/ provide has done so.
aka: When the revenues are earned and expenses are incurred.
Expenses are: - CORRECT ANSWER - Not deductible unless the tax law says they are
Something has to be _____, _______, and ______ to be deductible - CORRECT ANSWER -
Ordinary, necessary, and reasonable
Requirements for deductible business expenses:
Ordinary - CORRECT ANSWER - Normal, usual or customary for the business type
Ordinary is different depending on: - CORRECT ANSWER - The type of business.
Ex. an office has computers, desks, etc
A salon has shampoo, scissors, blowdryers, etc.
What is "normal"/ordinary varies by business
Requirements for deductible business expenses:
Necessary - CORRECT ANSWER - Appropriate and helpful in taxpayer's business
ex. A computer is helpful but not NEEDED or else business will fail
Requirements for deductible business expense:
Reasonable in amount - CORRECT ANSWER - Fair, equitable, justifiable based upon facts
and circumstances
(small banks vs national bank)
Common business deductions: - CORRECT ANSWER - Advertising
Bad Debt
, Commissions & Fees
Depreciation & Amortization
Insurance
Interest
Professional Fees
Taxes & Licenses
Supplies
Salaries & Wages
Office Expense & Postage
Payroll Taxes
Employee Benefit Programs
Pension & Profit-Sharing Plans
Rents
Repairs & Maintenance
Travel
Utilities
Non deductible expenses: - CORRECT ANSWER - Federal Income Tax
Personal Expenses
Social Club Dues (lake club, etc)
Entertainment Expenses
Political & Lobbying Expenses (if you're paying to lobby, non-deductible)
Bribes & Kickbacks
Fines & Penalties due to Law Violations (trucking companies probably have many speeding
tickets but they are not deductible)
Clothing that can be worn "every day" (things that are not a uniform)
Expenses related to Tax Exempt Income (if income isn't taxable--->related expenses aren't)
