1.  The following items are considered business income, except

A. Bartering.
B. Cancelled debts.
C. Advance payments with no restrictions on use or enjoyment.
D. Sales tax.

2. People who are in an independent trade, business, or profession in which they offer their services to the general public such as doctors, dentists, lawyers, accountants, contractors and subcontractors are generally independent contractors. The general rule is that an individual is an independent contractor if the payer

A. Has the right to control or direct the way the work is done.
B. Pays him/her on a weekly basis or any other pay period.
C. Has the right to control or direct only the result of the work and not how it will be done.
D. None of the above.

3. Which of the following amounts should be included as income to John?

A. John owns a rental house and the rental agreement directs the lessee to pay the $1,000 monthly rent to Michelle, his ex-wife.
B. The lessee erects a carport on the rental property without notifying John. Upon inspection, John estimates the value of the carport is approximately $2,000.
C. John ships goods on consignment to a vendor. The fair market value of the goods is $10,000.
D. The consignment vendor sells $3,000 of John's goods and places the proceeds in an escrow account controlled by the vendor.

4. In regards to the credit for Employer-Provided Childcare facilities and services, which of the following is NOT true?

A. The employer applies for the credit on Form 8882, Credit for Employer-Provided Child Care Facilities and Services.
B. The credit allows for 25% of qualified expenses paid for employee childcare.
C. The credit allows for 10% of qualified expenses paid for childcare resource and referral services.
D. The dollar amount of the credit is not limited.

5. Paul owns and operates a gourmet food store as a sole proprietorship out of a building he also owns. Based on the following information regarding 2009, compute his self-employment income (for SE tax purposes) for 2010.

A. $25,000.
B. $27,000.
C. $38,000.
D. $40,000.

6. Which of the following earnings is not subject to self-employment tax?

A. Gains and losses, by a dealer in options or commodities, from dealing or trading in foreign currency contracts.
B. Fees earned by a professional fiduciary who administers a deceased person's estate.
C. Fees received for services performed as a notary public.
D. All of the above.

7. Hahn Company, a calendar year taxpayer operating as a sole proprietorship, reports Federal income taxes employing the accrual method of accounting. Hahn Company shows the following items of income and expense for 2010:

For 2010 year tax purposes, what is the amount of Hahn Company's net income reportable on Schedule C, "Profit or Loss from Business (Sole Proprietorship)"?

A. $122,500.
B. $120,000.
C. $105,000.
D. $115,500.

8. John has three employees who are certified as members of a targeted group. Two of the employees worked for John for 2 months in 2008 and came back to work for John on January 1, 2010. The other employee began working for John on January 1, 2010. Each employee makes $1,000 per month. How much can John claim as qualified first year wages in computing the Work Opportunity Credit?

A. $12,000.
B. $6,000).
C. $36,000.
D. $0.

9. Rob and George own an office building that was built in 1980. They opened a tax return business in 2009 and made numerous renovations during 2010 to the building to bring it into compliance with the Americans with Disabilities Act of 1990. They had gross receipts of $750,000 dollars and ten full-time employees during 2009 and they spent $15,000 in eligible access expenditures. What is the current year Disabled Access Credit?

A. $5,000.
B. $1,500.
C. $14,750.
D. $7,500.

10. Ryan runs a manufacturing business employing several people with young children. These employees require daycare as both parents work. He decided that, in order to make it easier for his employees to come to work each day, he would allocate some of the unused space in his manufacturing facility to a child care facility. In 2009, he incurred $20,000 in qualified childcare facility expenditures. He had no qualified childcare resource and referral expenditures and had no pass through credits. What is Ryan's credit for 2010.

A. $20,000.
B. $2,000.
C. $10,000.
D. $5,000.

11. The Investment Credit is:

A. A credit for purchasing a business.
B. Based on 20% of investment interest.
C. A total of the Energy Credit, Qualified advanced coal project credit, Qualified gasification project credit, and the Rehabilitation Credit.
D. Available only for businesses with loans from the Small Business Administration.

12. In 2009, Santergraph, Inc. remodeled and converted a portion of their building into a licensed child care facility open for the care of any of their employee's children. The cost of this remodeling qualifies for which of the following:

A. An asset to be depreciated over the remaining useful life of the building.
B. An adjustment to income of 75% of the costs, with the balance depreciable.
C. A tax credit of 25% of the qualified childcare facility expenditures plus 10% of the qualified childcare resource and referral expenditures paid or incurred, maximum credit of $150,000, with balance depreciable.
D. Section 179 expensing election.

13. Maude has a small business that has a profit of $15,000. Her husband, Harold, has a farm that has a loss of $7,000. They are married. Which of the following is correct regarding their self-employment tax computation?

A. If they file separately, Harold may not elect to use the optional method.
B. Maude must pay self-employment tax on $15,000.
C. On a joint return, the self-employment tax may be computed based on $8,000 of income for Maude only.
D. If they file separately, they may elect to split the net profit for self-employment tax purposes, each paying based on $4,000.

14. In 2010, Animor, a self-employed business man, has prepared payroll tax returns and income tax returns for Yethir, Inc. on a continuous basis. In 2010, Yethir, Inc. paid Animor $900 for his services. What is Yethir, Inc.'s reporting responsibility?

A. File a W-2 for $900.
B. File a 1099 MISC for $900.
C. No documents need to be filed because the payee is a sole proprietor.
D. No documents need to be filed because the payer, Yethir, Inc., is incorporated.

15. Luck and Charm Partnership provides consulting services to the public. In 2010, the firm performed services and in exchange received a truck with a fair market value of $10,000, adjusted basis of $7,500: and also received lawn care services with a fair market value of $5,000. Luck and Charm uses the cash basis method for accounting purposes. What must Luck and Charm report as income for 2010?

A. $12,500.
B. $10,000.
C. $5,000.
D. $15,000.

16. The taxpayer earned $1,000 in interest in 2008. Taxpayer withdrew $700 in 2009 and $300 in 2010. How much of the original $1,000 should taxpayer report as interest in 2010?

A. $0.
B. $300.
C. $700.
D. $1,000.

17. Dawn meets the requirements for deducting expenses for the business use of her home. She uses 20% of her home for her business. She had the following income and expenses. What amount of depreciation will be allowed under the office in home deduction limitation rules?

A. $0.
B. $200.
C. $800.
D. $1,600.

18. Mary, a seamstress, made loans of $5,000 and $1,000 to Buttons & Bows and Thread Bare, respectively. Both of these establishments are partnerships. Mary also made a loan of $2,000 to her cousin Sarah, who was starting her own business as a proprietorship. The loans to both partnerships improved Mary's business, which was the reason Mary made the loans. If all three loans become uncollectible, what amount may Mary deduct as a business bad debt?

A. $5,000.
B. $6,000.
C. $1,000.
D. $2,000.

19. The F&E Partnership spent $100,000 on eligible access expenditures that qualify for the disabled access credit. The partnership had gross receipts of $1 million and 30 full-time employees during the preceding tax year. What is the amount of the disabled access credit for the year 2010?

A. $5,000.
B. $10,000.
C. $250.
D. $50,000.

20. You generally must file an income tax return for the year 2010 if your net earnings from self-employment is ____ or more.

A. $600.
B. $400.
C. $300.
D. $100.

21. Self-employment tax (SE tax) is a Social security and Medicare tax primarily for individuals who

A. Are retired
B. Work for an employer
C. Work for themselves
D. Are disabled.

22. If you and you spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. If you and your wife live in a community property state, you can

A. Use Schedule C or C-EZ.
B. File Form 1065.
C. Treat the business either as a sole proprietorship or a partnership.
D. All of the above

23. If you have employees, you will need to file forms to report employment taxes. Employment taxes include

A. Social security and Medicare taxes.
B. Federal income tax withholding.
C. Federal unemployment (FUTA) tax.
D. All of the above.

24. When you pay out or receive certain payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Use Form 1099-Misc., to report certain payments you make in your business, such as

A. Payments of $600 or more for services performed for your business by people not treated as your employees.
B. Rent payments of $600 or more
C. Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows.
D. Any of the above

25. Use Form 1099-Misc., to report your sales of consumer goods to a person for resale anywhere other than in a permanent retail establishment for the amount of

A. $600 or more
B. $400 or more
C. $5,000 or more
D. $3,000 or more

26. The annual accounting period for your income tax return is called a tax year. You can use which of the following tax year (s)?

A. A calendar tax year.
B. A fiscal tax year.
C. An adopted tax year.
D. A or B above.

27. You are a self-employed lawyer. You perform legal services for a client, a small corporation. In payment for your services, you receive shares of stock in the corporation. You

A. Must include the fair market value of the shares in income.
B. Cannot include the fair market value of the shares in income.
C. Don't have to report your shares since they have no cash liquid value.
D. None of the above.

28. A calendar year is 12 consecutive months beginning January 1 and ending December 31. You must adopt the calendar tax year if

A. You keep no records.
B. You have no annual accounting period.
C. Your present tax year does not qualify as a fiscal year.
D. Any of the above.

29. You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business.  You can use the cash method, the accrual method, special methods, or a combination method using elements of two or more methods. Whichever method you use, it has to be a method that

A. Is used to figure personal items.
B. Is special method of accounting for certain items of income and expenses.
C. Clearly shows all of your expenses.
D. Clearly shows your income.

30. Under this method of accounting, you include in your gross income all items of income you actually receive and deduct expenses in tax year in which you actually pay them.

A. Hybrid method.
B. Accrual method.
C. Cash method.
D. Special method.

31. Under this method of accounting, you include income in gross income in the year earned and deduct expenses in the year incurred. The purpose is to match income and expenses in the correct year.

A. Hybrid method.
B. Accrual method.
C. Cash method. 
D. Special method.

32.  You use the cash method of accounting. You receive a valid check by the end of tax year 2010. With all the holiday shopping and celebrations, you did not have time to cash or deposit the check until tax year 2011. What tax year is this money for?

A. You report money as received in tax year 2010.
B. You report money as received in tax year 2011.
C. You can choose to report your money in 2010 or 2011 because you received it towards the end of the year.
D. The check was valid but since you were not able to cash it until 2011, you report the money for tax year 2011.

33. An amount of income is credited to your bank account or is made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. This is called

A. Restriction receipt.
B. Cash receipt.
C. Constructive receipt.
D. Instant receipt.

34.  If you are self employed as a sole proprietor or are an employee who received a 1099-misc instead of a W-2 or you are considered an independent contractor, use Schedule C or C-EZ (Form 1040) to figure your earning subject to SE tax. You must pay self-employment tax and file Schedule SE (Form 1040) if your net earnings from self-employment were

A. $600.00 or more.
B. $400.00 or more.
C. $1,000.00 or more.
D. None of the above.

35. Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. However, if you are a qualifying small business taxpayer you can use the cash method of accounting even if you produce, purchase or sell merchandise. You are a qualifying small business taxpayer only if in 3 years your average annual gross receipts were

A. More than $1,000 but less than $1,000,000.
B. Less than $1,000,000.
C. More than $1,000,000 but less than $10,000,000.
D. Less than $100,000.

36. In some cases, money or property received is not income. The following is an example of an item that is not income.

A. Loans.
B. Sales tax.
C. Consignments.
D. All of the above.

37. If there is a connection between any income you receive and your business and it is clear that the payment of income would not have been made if you did not have the business, then

A. The income is business income.
B. The income is not business income.
C. The income is not taxable.
D. The income needs to be capitalized.

38. You are a self-employed painter. You painted a house for a client. The client was unable to pay you and in return you took his refrigerator because you knew he was never going to pay you. The refrigerator was almost new and besides it was loaded with food. You figured the fair market value of the fridge was in the ball park of the amount he owed you for painting his house. You must

A. Include the fair market value of the refrigerator (and food) as income.
B. Not include the fair market value of the refrigerator (and food) as income.
C. Still demand payment because the refrigerator is no considered proper pay.
D. None of the above

39. Generally if your debt is cancelled or forgiven, other than as a gift or bequest to you, you must

A. Not do anything because a cancelled debt is not considered taxable income.
B. Include the cancelled debt amount in you gross income for tax purposes.
C. Wait to see if you receive a letter from the IRS, if you don't that means that you are not selected to report the cancelled debt.
D. Report the cancelled debt only if you filed bankruptcy.

40. If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure by

A. Dividing gross profit by net receipts.
B. Comparing a percentage of your markup policy.
C. Determining the reason for the difference if there is difference of the percentage of your markup policy.
D. All of the above.

41. If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. However, to determine these costs, you must

A. Value your inventory at the beginning of the year.
B. Value your inventory at the end of the year.
C. Compare your business to your competition.
D. Both A and B above.

42. You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income in the first place. This method of accounting would be the

A. Accrual method.
B. Cash method.
C. Personal method.
D. Business method.

43. You can generally deduct as a business expense all interest you pay and accrue during the tax year on debts related to your business. Interest relates to your business if you use the proceeds on the loan for a business expense. You can deduct interest on a debt only if

A. You are legally liable for that debt.
B. Both you and the lender intend that the debt be repaid.
C. You and the lender have a true debtor-creditor relationship.
D. All of the above.

44. Your are a direct newspaper carrier or distributor and your earnings are subject to SE tax if

A. You are in the business of delivering or distributing newspapers or shopping news.
B. Substantially all your pay for these services directly relates to your sales rather than to the amount of hours you work.
C. You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes.
D. All of the above.

45. Heather owns Copies Done Right. Her net profit from her business is $102,000 for tax year 2009. Her SE tax (including Medicare part) is

A. $ 14,918.
B. $ 14,412.
C. $ 15,606.
D. $ 12,090.

You will need IRS Publication 538 to complete the following.

46. Which of the following statements is NOT correct?

A. Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred.
B. Under an accrual method of accounting, you generally report receipt of an advance payment for services to be performed in a later tax year as income in the year you receive the payment.
C. Under an accrual method of accounting, business expenses and interest owned to a related person who uses the cash method of accounting are deductible when the all-events test has been met.
D. Under an accrual method of accounting, you can take a current deduction for taxes when economic performance occurs.

47. Which of the following in NOT an acceptable inventory practice?

A. You claim a casualty or theft loss of inventory through the increase in the cost of goods sold by properly reporting your opening and closing inventories.
B. To property value inventory at cost, reduce the invoice price of inventory by a trade discount.
C. Under the lower of cost or market method, compare the market value of each item on hand on the inventory date with its cost and use the lower of the two as its inventory value.
D. To properly value inventory at cost, include only the direct costs associated with each item.

48. Mary is a calendar year, accrual basis taxpayer. She sold merchandise on December 30, 2010. She billed the customer in the first week on January, 2011. The billing was returned for insufficient postage and Mary sent a second bill in February, 2011. When should Mary include the sale in income?

A. January, 2011.
B. March, 2011.
C. December, 2010.
D. February, 2011.

49. A partnership, S corporation or personal service corporation can elect to use a tax year other than its required tax year, if it:

A. Elects a year that meets the deferral period requirement.
B. Is not a member of a tiered structure as defined by the regulations.
C. Has not previously had an election in effect to use a tax year other than its required tax year.
D. All of the above.

5. Eric, a cash basis taxpayer, owned 25% of Watson, Inc. stock. Watson, Inc. files a calendar year U.S. Corporate Income Tax Return Form 1120 employing the accrual method of accounting. Eric loaned Watson, Inc. $100,000 at the beginning of 2009. The accrual interest on this loan was $5,000 as of December 31, 2009. Watson, Inc. paid Eric the $5,000 in January of 2010. How should Eric report the interest income and Watson, Inc. report the interest expense from this transaction?

A. Watson, Inc. reports the expense in 2009 and Eric reports the income in 2009.
B. Watson, Inc. reports the expense in 2009 and Eric reports the income in 2010.
C. Watson, Inc. reports the expense in 2010 and Eric reports the income in 2010.
D. None of the above.

6. Mark is an accrual basis taxpayer. He shipped $500 worth of merchandise to Ralph on December 30, 2010. Mark sent Ralph an invoice January 2, 2011 that was payable in 30 days. Ralph mailed his check to Mark on February 2, 2011. Mark deposited the check on February 6, 2011. Mark received and reconciled his bank statement March 3, 2011. When does Mark record the $500 in income?

A. January 2, 2011 because that is when he invoiced Ralph.
B. March 3, 2011 because that is when Mark verified that the $500 check had been accepted as a deposit.
C. December 30, 2011, the date when he shipped the merchandise to Ralph.
D. February 6, 2011 because that is when Mark deposited the check from Ralph.

7. Which of the following items are generally included in inventory?

A. Goods for sale that someone else has consigned to you.
B. Equipment used in your business to manufacture goods.
C. Goods you have sent out on consignment for someone else to sell.
D. Goods in transit to you for which title has not yet passed to you.

8. New ABC Partnership is organized in 2010 with three general partners. The partners include a corporation with a tax year ending on March 31 and a 60% interest in partnership capital and profits, and two individuals, each having a calendar tax year and a 20% interest in partnership capital and profits. The partnership's required tax year ends on:

A. March 31.
B. September 30.
C. October 31.
D. December 31.

9. Given the fact patterns below, which of the following entities may not use the cash method of accounting?

A. The Acme Partnership had gross receipts of $3,500,000 in 2010. Its gross receipts for 2007 were $8,000,000 and its gross receipts for 208 were $3,000,000.
B. John Jones manufactures and sells fans. His average annual gross receipts since 2006 are $975,000.
C. Dallas Partnership has two partners in 2010 - Joe Dallas, an individual, and Deer, Inc. a corporation. Dallas Partnership averaged annual gross receipts are $6,500,000.
D. John Gibb files his 2010 Form 1040 with an attached Schedule C reflecting $11,000,000 in gross receipts from selling real estate.

10. Under the "lower of cost or market" method, what is the value of the following items that should be included in closing inventory?

A. $800.
B. $1,000.
C. $1,050.
D. $1,250.

11. Jim is a cash basis taxpayer and is an electrician. He received the following in 2010:

How much does Jim have to report in his income for 2010?

A. $34,000.
B. $35,000.
C. $33,000.
D. $31,000.

12. Abraham becomes an equal partner in the Kit, Kat and Kidd Partnership in 2010. In 2009, he filed his personal tax return on the calendar tax year basis. The partnership reports income and expenses on the fiscal tax year basis. How should Abraham report partnership income or loss distributed to him?

A. Abraham may choose a fiscal year to report income and expenses.
B. Abraham must report income and expenses on the calendar year basis.
C. Abraham may choose either a calendar tax year or fiscal tax year to report income and expenses.
D. Abraham may choose a fiscal tax year and later obtain IRS approval if he wishes to change to a calendar tax year for reporting income and expenses.

13. The Kilometer Partnership sells computers and maintains its accounting system on the accrual basis. Kilometer sold and delivered a computer on December 29, 2009 and billed the customer $3,250 on January 7, 2010. Kilometer received the $3,250 payment on February 15, 2010. The check cleared on February 22, 2008. On which date will Kilometer recognize this income?

A. January 7, 2010.
B. February 15, 2010.
C. December 29, 2009.
D. February 22, 2010.

14. The following methods of accounting for inventory are considered acceptable, except:

A. Cost.
B. First In First Out.
C. Last In First Out.
D. Trade Discount Method.

15. Jeremiah, a cash basis taxpayer, is a salesman. He sold $100,000 of merchandise in March 2009. His commission is 2% of sales. In November 2009, he received $2,000 in commissions for those sales and an advance of $7,000 in commissions for future sales in 2010. What amount must John include in his income for 2010?

A. $9,000.
B. $2,000.
C. $3,167.
D. $0.

16. Which of the following dates would not be considered the end of a tax year?

A. The Last Friday in June.
B. September 30, 2010.
C. April 15, 2010.
D. December 31, 2010.

17. Which of the following accounting methods in not an acceptable method of reporting income and expenses?

A. If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. You can use the cash method for all other items of income and expenses.
B. If you the cash method for figuring your income, you can use the accrual method for figuring your expenses.
C. Any combination that includes the cash method is treated as the cash method.
D. You can use different accounting methods for reporting business and personal items.

18. Phil and Don are equal partners in the Hilldale Company. Hilldale has a fiscal year ending on January 31. Phil and Don file their individual tax returns on a calendar year basis. For the tax year ending January 31, 2010, Hilldale had taxable income from the active conduct of its business of $100,000 of which $60,000 was earned in 2009. How much of their partnership taxable income should Phil and Don each include in computing their taxable income limit for the 2010 tax year?

A. $50,000.
B. $20,000.
C. $30,000.
D. $0.

19. The Foster & Graves Partnership values its inventory under lower of cost or market value method. Under this method, what is the value of the ending inventory?

A. $525.
B. $555.
C. $545.
D. $520.

20. A taxpayer suffered an $11,000 loss of inventory when his cooler malfunctioned. He had no insurance for this type of loss. He shows this loss on his tax return by:

A. Taking a bad debt deduction of $22,000, the amount he would have sold the inventory for.
B. Taking an ordinary loss on Form 4797 of $11,000.
C. Taking a business loss on his Schedule C as reflected by an increase of $11,000 in cost of goods sold.
D. Taking a loss of $11,000 as a bad debt on Schedule D.

Copyright © 2011 [Hera's Income Tax School]. All rights reserved.
Revised: 05/12/12