Answer the following statements true (T) or false (F)

Question

1. Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.
2. Rachel, a self-employed business consultant, has significant expenses for travel business meals with clients in her work, but she has not kept receipts. She will be able to deduct a reasonable amount of these ordinary and necessary expenses under the Cohan rule.
3. A small business uses the accrual method of accounting for its financial statements. It must also use the accrual method for computing taxable income.
4. Expenses paid with a credit card are deductible at the time a cash-basis taxpayer pays for the charge.
5. Points paid in connection with the purchase of a principal residence may be deducted in the year paid.

Answer 1

1. TRUE
For new business ventures, the key to current deduction of business investigation and pre-opening costs or capitalization and amortization of those costs rests on whether the taxpayer is already engaged in a similar business.
2. FALSE
The Cohan rule does not apply to travel and entertainment. The Code does not allow any travel and entertainment deductions unless strict documentation requirements are met.
3. FALSE
The tax law does not require book-tax accounting conformity except in the case of using LIFO for inventory accounting.
4. FALSE
The expenses are deductible at the time of the charge.
5. TRUE
Normally prepaid interest must be amortized over the life of the loan, but an exception allows immediate deduction in the case of the purchase of a principal residence.