Question & Answer

This year BPS billed clients for $86,700 and collected $61,000 in cash for golf lessons completed during the year. In addition, BPS collected an additional $14,500 in cash for lessons that will commence after year-end. Binu hopes to collect about half of the outstanding billings next year, but the rest will likely be written off. 

Besides providing private golf lessons, BPS also contracted with the country club to staff the driving range. This year, BPS billed the country club $27,200 for the service. The club paid $17,000 of the amount but disputed the remainder. By year-end, the dispute had not been resolved, and while Binu believes BPS is entitled to the money, the remaining $10,200 has not been paid.

BPS has accrued the following expenses (explained below):

Advertising (in the clubhouse)$ 13,150

Pro golf teachers’ membership fees860

Supplies (golf tees, balls, etc.)4,720

Club rental6,800

Malpractice insurance2,400

Accounting fees8,820

The expenditures were all paid for this calendar year, with several exceptions. First, Binu initiated his golfer’s malpractice insurance on June 1 of this year. The $2,400 insurance bill covers the last six months of this calendar year and the first six months of next year. At year-end, Binu had only paid $600, but has assured the insurance agent the remaining $1,800 will be paid early next year. Second, the amount paid for club rental ($100 per week) represents rental charges for the last 6 weeks of the previous year, the 52 weeks in this calendar year, and the first 10 weeks of next year. Binu has also mentioned that BPS only pays for supplies that are used at the club. Although BPS could buy the supplies for half the cost elsewhere, Binu likes to “throw some business” to the golf pro shop because it is operated by his brother.

Complete a draft of Parts I and II on the front page of a Schedule C for BPS. 

In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin deduct in year 0 in each of the following alternative scenarios? 

] Brown Thumb Landscaping is a calendar-year, accrual-method taxpayer. In September, Brown Thumb negotiated a $14,000 contract for services it would provide to the city in November of the current year. The contract specifies that Brown Thumb will receive $4,000 in October as a down payment for these services, and it will receive the remaining $10,000 in January of next year. 

Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are taxable income to Jeremy this year if Jeremy is (1) a cash-method taxpayer and (2) an accrual-method taxpayer.

Nicole is a calendar-year taxpayer who accounts for her business using the cash method. On average, Nicole sends out bills for about $12,000 of her services at the first of each month. The bills are due by the end of the month, and typically 70 percent of the bills are paid on time and 98 percent are paid within 60 days. 

] In July of this year, Stephen started a proprietorship called ECR (which stands for electric car repair). ECR uses the cash method of accounting and Stephen has produced the following financial information for this year: 

This year, Amy purchased $2,000 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during the year, she does not claim any depreciation or cost recovery expense for the equipment. 

Renee operates a proprietorship selling collectibles over the Web. This year, Renee’s business reported revenue of $95.5 million and deducted $88.6 million in expenses and loss carryovers. Her business deductions included cost of goods sold of $48.5 million, sales commissions paid of $16.9 million, $10.5 million of interest paid on a mortgage, $10.7 million of depreciation, and $2 million deduction for a net operating loss carryover.

Red Inc. is a C corporation and a calendar-year taxpayer. Red reports sales of $26.1 million in 2021, $30.3 million in Year 2022, and $34.5 million in 2023. 

Sarah is a cash-method, calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the after-tax cost of each payment assuming she has a 37 percent marginal tax rate. 

Heather in an attorney who paid $15,000 to join a country club in order to meet potential clients. This year she also paid $4,300 in greens fees when golfing with clients and an additional $1,700 paid by Heather for meals with clients in the clubhouse. Under what circumstances, if any, can Heather deduct all or part of the $21,000 paid to the country club this year? 

] Haru is a self-employed cash-method, calendar-year taxpayer, who made the following cash payments related to his business this year. Calculate the after-tax cost of each payment assuming Haru has a 37 percent marginal tax rate. 

Ryan is self-employed. This year Ryan used his personal auto for several long business trips. Ryan paid $1,500 for gasoline on these trips. His depreciation on the car if he was using it fully for business purposes would be $3,000. During the year, he drove his car a total of 12,000 miles (combination of business and personal travel). 

Sasha is a self-employed taxpayer. They recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios? 

Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses: $250 fee to register for the conference, $300 per night for three nights’ lodging, $200 for meals, and $150 for cab fare. 

Armelio operates a business that acts as a sales representative for a client that produces and sells precious metals to electronic manufacturers. Armelio contacts manufacturers and convinces them to sign contracts for delivery of metals, and his company earns a commission on the sales. This year, Armelio contacted a jeweler to engrave small lapel buttons for his client’s employees. Armelio paid $20 each for the lapel buttons, and the jeweler charged Armelio an additional $7 for engraving. Can Armelio deduct the cost of the lapel buttons as business gifts? (Hint: see §274(b) and Reg. §1.274-3.)

Indicate the amount (if any) that Josh can deduct as an ordinary and necessary business deduction in each of the following situations and explain your solution. 

Michelle operates several food trucks. Indicate the amount (if any) that she can deduct as an ordinary and necessary business deductions in each of the following situations and explain your solution. 

] Manny hired his brother’s firm to provide accounting services to his business. During the current year, Manny paid his brother’s firm $82,000 for services even though other firms were willing to provide the same services for $40,000. How much of this expenditure, if any, is deductible as an ordinary and necessary business expenditure? 

What is a §481 adjustment, and what is the purpose of this adjustment? 

Describe two specific accounting methods that are treated as initiated by the taxpayer without any need for consent of the IRS when the business qualifies under the gross receipts test.

Describe why the IRS might be skeptical of permitting requests for changes in accounting method without a good business purpose. 

Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.

What are the relative advantages of the cash and accrual methods of accounting? 

Describe the related-person limitation on accrued deductions. What tax savings strategy is this limitation designed to thwart?