Assignment
I. Paragraph 2 states that Carrie used the hybrid method of accounting for tax reporting purposes. The hybrid method requires Carrie to report:
1. Inventory on the accrual basis for inventory transactions realized, while reporting all other aspects of the business on the cash basis for transactions realized.
2. Inventory on the accrual basis for inventory transactions not realized, while reporting all other aspects of the business on the cash basis for transactions realized.
3. Inventory on the accrual basis for inventory transactions realized, while reporting all other aspects of the business on the cash basis for transactions not realized.
4. Inventory on the cash basis for inventory transactions realized, while reporting all other aspects of the business on the accrual basis for transactions realized.
5. None of the other choices are correct.
II. Paragraph 2 provides inventory information which is necessary to determine:
1. Cost of goods sold on Sch. C, Part I, Line 4
2. Gross receipts or sales on Sch. C, Part I, Line 1
3. Supplies on Sch. C, Part II, Line 22
4. Other expenses on Sch. C, Part II, Line 27a
5. None of the other choices are correct.
III. Paragraph 1 states that Carrie is a licensed hairstylist and operates her own business. If Carrie had business expenses as a drug dealer, instead of as a licensed hairstylist, then:
1. Carrie, as a drug dealer, would be legally entitled to deduct only cost of goods sold, not any other business expenses, because gross income is defined as sales minus cost of goods sold, and IRC section 280E prohibits any deductions for drug dealers.
2. Carrie, as a drug dealer, would be legally entitled to deduct cost of goods sold and any other business expenses.
3. Carrie, as a drug dealer, would be legally entitled to deduct only business expenses other than cost of goods sold, because the tax law prohibits deductions for the cost of drugs that a dealer purchases as inventory.
4. Carrie, as a drug dealer, would not be legally entitled to deduct cost of goods sold, nor any other business expenses, because gross income is defined as sales minus cost of goods sold, and IRC section 280E prohibits any deductions for drug dealers.
5. None of the other choices are correct.
IV. Paragraph 5 states that Carrie paid a fine of $500 for improper disposal of certain waste chemicals, and attorney's fee of $600 in 2015. Which of the following, if any, is/are true:
1. Carrie can legally deduct the $500 fine because the origin and character of the claim are directly related to her trade or business.
2. Carrie can legally deduct the $600 attorney's fee because the legal representation was for criminal defense associated with Carrie's trade or business.
3. Carrie can legally deduct the $600 attorney's fee because she can itemize on Schedule A.
4. Carrie can legally deduct neither the $600 attorney's fee nor the $500 fine because the offense of improper disposal of certain waste chemicals is actively enforced by local law enforcement.
5. None of the other choices are correct.