Question

Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting but he doesn’t keep any significant inventories of the specialized assets that he sells. Joe reported the following financial information for his business activities during year 0.

Determine the effect of each of the following transactions on the taxable business income. (Select "No Effect" from the dropdown if no change in the taxable business income.)

Required:

Joe has signed a contract to sell gadgets to the city. The contract provides that sales of gadgets are dependent upon a test sample of gadgets operating successfully. In December, Joe delivers $13,350 worth of gadgets to the city that will be tested in March. Joe purchased the gadgets especially for this contract and paid $9,450.

Joe paid $275 for entertaining a visiting out-of-town client. The client didn’t discuss business with Joe during this visit, but Joe wants to maintain good relations to encourage additional business next year.

On November 1, Joe paid $590 for premiums providing for $59,000 of “key man” insurance on the life of Joe’s accountant over the next 12 months.

At the end of year 0, Joe’s business reports $11,850 of accounts receivable. Based upon past experience, Joe believes that at least $2,570 of his new receivables will be uncollectible.

In December of year 0, Joe rented equipment to complete a large job. Joe paid $5,850 in December because the rental agency required a minimum rental of three months ($1,950 per month). Joe completed the job before year-end, but he returned the equipment at the end of the lease.

Joe hired a new sales representative as an employee and sent her to Dallas for a week to contact prospective out-of-state clients. Joe ended up reimbursing his employee $490 for airfare, $540 for lodging, $440 for meals, and $340 for entertainment (Joe provided adequate documentation to substantiate the business purpose for the meals and entertainment). Joe requires the employee to account for all expenditures in order to be reimbursed.

Joe uses his BMW (a personal auto) to travel to and from his residence to his factory. However, he switches to a business vehicle if he needs to travel after he reaches the factory. Last month, the business vehicle broke down and he was forced to use the BMW both to travel to and from the factory and to visit work sites. He drove 215 miles visiting work sites and 84 miles driving to and from the factory from his home. Joe uses the standard mileage rate to determine his auto-related business expenses. (Round your answer to whole number. Use standard mileage rate.)

Joe paid a visit to his parents in Dallas over the Christmas holidays. While he was in the city, Joe spent $145 to attend a half-day business symposium. Joe paid $390 for airfare, $126 for meals during the symposium, and $77 on cab fare to the symposium.

    

Answer 1

Joe has signed a contract to sell gadgets to the city. The contract provides that sales of gadgets are dependent upon a test sample of gadgets operating successfully. In December, Joe delivers $13,350 worth of gadgets to the city that will be tested in March. Joe purchased the gadgets especially for this contract and paid $9,450.

No effect on taxable income. Since Joe’s sale is dependent on a test, there is no guarantee that he would receive the money. The gadgets that were specifically bought for the contract cannot be deducted from year 0 because there will not be any income from the contract in year 0. If the contract goes through and Joe is paid in year 1, then the contract and all the income and expenses associated with it will go on year 1 taxes

Joe paid $275 for entertaining a visiting out-of-town client. The client didn’t discuss business with Joe during this visit, but Joe wants to maintain good relations to encourage additional business next year.

No effect on taxable income. In order to be able to deduct 50% of the meals and entertainment of business associates, the amount must be reasonable. The taxpayer or employer must be present, and the entertainment or meal is either “directly related” or “associated with” the active conduct of business. Joe paid $275 for entertaining a client, but there was not any business conducted during that time.

On November 1, Joe paid $590 for premiums providing for $59,000 of “key man” insurance on the life of Joe’s accountant over the next 12 months.

No effect on taxable income. The restrictions do not allow business owners to deduct the cost of life insurance premiums paid for policies on key employees. If the employee died, the death benefit is not taxable, so the premium paid cannot be deducted from the taxable income. The $590 premium paid for a life insurance policy for Joe’s accountant is not deductible.

At the end of year 0, Joe’s business reports $11,850 of accounts receivable. Based upon past experience, Joe believes that at least $2,570 of his new receivables will be uncollectible.

$11,850 increase in income. The receivables will be reflected as sales that will increase the income. There will not be any dollar amount deducted for the receivables that joes think will be uncollectible. In order to be able to deduct for uncollectable accounts receivables, the debt has to become worthless during the tax year. Since Joe only thinks that $2,570 of his new accounts receivables will be uncollectible, he cannot deduct this amount from his taxable income.

In December of year 0, Joe rented equipment to complete a large job. Joe paid $5,850 in December because the rental agency required a minimum rental of three months ($1,950 per month). Joe completed the job before year-end, but he returned the equipment at the end of the lease.

Reduce the taxable income in year 0 by $1,950. The $5850 cost of the lease will be spread out over the course of the lease terms. So only $1,950 for December will be able to be deducted during year 0. The other $3,900 will be deducted during year 1 for the months of January and February since Joes uses the accrual method of accounting

Joe hired a new sales representative as an employee and sent her to Dallas for a week to contact prospective out-of-state clients. Joe ended up reimbursing his employee $490 for airfare, $540 for lodging, $440 for meals, and $340 for entertainment (Joe provided adequate documentation to substantiate the business purpose for the meals and entertainment). Joe requires the employee to account for all expenditures in order to be reimbursed.

Reduce the taxable income by $1420. Since the sole purpose of the trip was business and the sales representative was out of town overnight. Joe can deduct the expenses related to the trip from his taxable income. He can deduct $490 for airfare, $540 for lodging, $220 for meals ($440 * 50%) and $170 ($340 *50%) for entertainment. The most that is allowed to be deducted for both meals and entertainment is 50%. In order for Joe to be able to deduct this amount the sales representative had to keep all receipts as proof of payment, and Joe had to reimburse her.

Joe uses his BMW (a personal auto) to travel to and from his residence to his factory. However, he switches to a business vehicle if he needs to travel after he reaches the factory. Last month, the business vehicle broke down and he was forced to use the BMW both to travel to and from the factory and to visit work sites. He drove 215 miles visiting work sites and 84 miles driving to and from the factory from his home. Joe uses the standard mileage rate to determine his auto-related business expenses. (Round your answer to whole number. Use standard mileage rate.)

Reduce the taxable income by $124.70. The 84 miles that Joe drives from his home to the factory are considered personal and they cannot be deducted from his income. The 215 miles that he drove from the factory visiting work sites is deductible. The amount is calculated using standard mileage rate for 2019. The standard mileage rate for 2019 is 58 cents per mile for business use. To find Joes amount multiply 215 miles by 58 cents.

Joe paid a visit to his parents in Dallas over the Christmas holidays. While he was in the city, Joe spent $145 to attend a half-day business symposium. Joe paid $390 for airfare, $126 for meals during the symposium, and $77 on cab fare to the symposium.

Reduce the taxable income by $285. Since the main purpose of Joe’s trip is personal and not business, he cannot deduct the cost of travelling to Dallas. He can deduct the $145 cost of the registration for the symposium, $77 cost of the cab fare to the symposium, and $63 meals while there. He is allowed to deduct 50% of the cost of meals for business trips, so since he spent $126 on meals he can deduct $63.