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.
a. 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 $12,000 worth of gadgets to the city that will be tested in March. Joe purchased the gadgets especially for this contract and paid $8,500.
b. Joe paid $180 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.
c. On November 1, Joe paid $600 for premiums providing for $40,000 of “key man” insurance on the life of Joe’s accountant over the next 12 months.
d. At the end of the year (year 1), Joe’s business reports $9,000 of accounts receivable.
Based upon past experience, Joe believes that at least $2,000 of his new receivables will be uncollectible.
e. In December of year 0, Joe rented equipment for a large job. The rental agency required a minimum rental of three months ($1,000 per month), but
Joe completed the job before year-end.
f. 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 $300 for airfare, $350 for lodging, $250 for meals, and $150 for entertainment. Joe requires the employee to account for all expenditures in order to be reimbursed.
g. 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 120 miles visiting work sites and 46 miles driving to and from the factory from his home.
h. Joe paid a visit to his parents in Dallas over the Christmas holidays. While he was in the city, Joe spent $50 to attend a half-day business symposium. Joe paid $200 for airfare, $50 for meals during the symposium, and $20 on cab fare to the symposium.
a;20500
b.can not write off not business related
dgd
To determine the effect of each transaction on Joe's taxable business income, we need to analyze each transaction separately.
a. Joe signed a contract to sell gadgets to the city and delivered $12,000 worth of gadgets in December. Since Joe operates on the accrual method of accounting, the revenue from this sale will be recognized in the year the contract is signed and when the goods are delivered. Therefore, the $12,000 of revenue will be included in Joe's taxable business income for year 0. The cost of goods sold for this transaction is $8,500, which will be deducted as an expense in year 0.
b. Joe paid $180 for entertaining a visiting client. While this expense might help maintain good relations for future business, it is generally not tax-deductible unless there is a clear business purpose or it is directly related to the business discussed. Since the client didn't discuss business during the visit, this expense would not be deductible and will not affect Joe's taxable business income.
c. Joe paid $600 for premiums on a "key man" insurance policy for his accountant. Premiums paid for life insurance policies on the key employees of a business are generally not tax-deductible expenses. Therefore, this expense will not affect Joe's taxable business income.
d. Joe's business has $9,000 of accounts receivable at the end of year 1, and he estimates that at least $2,000 will be uncollectible based on past experience. To calculate the effect on taxable business income, Joe needs to apply the allowance method for doubtful accounts. By deducting the estimated uncollectible amount of $2,000 from the accounts receivable, Joe will reduce his taxable income by that amount.
e. Joe rented equipment for a large job in December of year 0. However, he completed the job before the year-end. The rental cost of $3,000 (3 months at $1,000 per month) will be recognized as an expense in year 0, regardless of when the job was completed. Therefore, this expense will affect Joe's taxable business income for year 0.
f. Joe hired a new sales representative and reimbursed her for various expenses related to a business trip to Dallas. The expenses for airfare, lodging, meals, and entertainment are all ordinary and necessary business expenses. Therefore, they will be deductible and will reduce Joe's taxable business income.
g. Joe used his personal BMW for both commuting to and from his residence to his factory and visiting work sites due to his business vehicle breaking down. Commuting expenses from home to the workplace are generally not tax-deductible. However, in this case, since the business vehicle was out of commission, the mileage driven to and from work sites (120 miles) can be considered a deductible business expense. Joe will need to keep track of the mileage and use the standard mileage rate or actual expenses to determine the deduction.
h. While visiting his parents in Dallas over the Christmas holidays, Joe attended a half-day business symposium and incurred various expenses related to the trip. Since the symposium has a clear business purpose, the expenses for airfare, meals during the symposium, and cab fare will be deductible business expenses. These expenses will reduce Joe's taxable business income.
In summary, the effect of each transaction on Joe's taxable business income is as follows:
a. Increase of $12,000 in revenue and $8,500 in cost of goods sold.
b. No effect on taxable business income.
c. No effect on taxable business income.
d. $2,000 reduction in taxable business income.
e. Increase in expenses based on the rental cost of equipment.
f. Deductible expenses for airfare, lodging, meals, and entertainment.
g. Deductible mileage expenses for visiting work sites but not for commuting.
h. Deductible expenses for airfare, meals, and cab fare related to the business symposium.