Question

Tom, an ornithologist, had been debating for years whether to venture out on his own and operate his own business. He had
developed a lot of solid relationships with clients and he believed that many of them would follow him if he were to leave his
current employer. As part of a New Year’s resolution, Tom decided he would finally do it. Tom put his business plan together
and, on January 1 of this year, Tom opened the doors of his business, Bird Watchers United (BWU). Assume BWU reports on a
calendar year and uses the accrual method of accounting; the business has no inventory.
Tom reported the following financial information for the year.
a) In January Tom rented a small business office about 12 miles from his home. He paid $10,000, which represented a
damage deposit of $4,000 and rent for two years ($3,000 annually).
b) Tom earned and collected $290,000 performing ornithology-related services and selling a specialized bird watching tool.
c) Tom received $50 interest from municipal bonds and $2,100 interest from other investments.
d) Tom purchased some new equipment in February for $42,500. He claimed depreciation on these assets during the year in
the amount of $6,540.
e) Tom paid $7,000 to buy luxury season tickets for his parents for City U football games.
f) Tom paid his father $10,000 for services that would have cost no more than $6,000 if Tom had hired any other local
business to perform the services. While Tom’s dad was competent, he does not command such a premium from his other
clients.
g) In an attempt to get his name and new business recognized, Tom paid $7,000 for a one-page ad in Birding World, a leading
trade magazine. He also paid $15,000 in radio ads to be run through the end of December.
h) Tom leased additional office space in a building downtown and paid rent of $27,000 for the year.
i) In November, Tom’s office was broken into and equipment valued at $5,000 was stolen. The tax basis of the equipment
was $5,500. Tom received $2,000 of insurance proceeds from the theft.
j) Tom incurred a $4,000 fine from the state government for bird watching in an unauthorized zone.
k) Tom contributed $3,000 to lobbyists for their help in persuading the state government to authorize certain unauthorized
bird watching zones.
l) On July 1, Tom paid $1,800 for an 18-month insurance policy for its business equipment. The policy covers the period July
1 of this year through December 31 of next year.
m) Tom borrowed $20,000 to help with the company’s initial funding needs. He used $2,000 of the funds to invest in
municipal bonds. At the end of the year, Tom paid the $1,200 of interest expense that accrued on the loan during the year.
n) Tom lives 12 miles from his office. He carefully tracked his mileage and determined that he drove his truck 6,280 miles
between the office and his home. He also drove an additional 7,200 miles between the office and traveling to client sites.
Tom did not use the truck for any other purposes. He did not keep track of the specific expenses associated with the truck.
However, while traveling to a client site, Tom received a $150 speeding ticket.
o) Tom purchased two season tickets (20 games) to attend City U baseball games for a total of $1,100. He took existing and
prospective clients to the games to maintain contact and find further work. This was very successful for Tom as he gained
many new projects through substantial discussions with the clients following the games.
p) Tom paid $3,500 for meals when sales employees met with prospective clients.
q) Tom had a client who needed him to perform work in Florida. Because Tom had never been to Florida before, he booked
one extra day and night for to go on a tour of the Everglades. Tom spent $400 for airfare and booked a hotel for 3 nights
($120/night). (Tom stayed two days for business purposes and one day for personal purposes.) He also rented a car for $45
per day. The client arranged for Tom’s meals while he was doing business.
r) Tom paid a total of $10,000 of wages to employees and cost of goods sold was $15,000.
s) At the end of the year Tom’s business reported $9,000 of accounts receivable. Based on past experience, Tom believes
that at least $2,000 of his receivables will be uncollectible.
t) In December, Tom rented equipment to complete a large job. He paid $3,000 in December because the rental agency
required a minimum rental of three months ($1,000 per month). Tom completed the job before year-end, but he returned
the equipment at the end of the lease.
u) Tom paid a visit to his parents in Denver over the Christmas holidays. While he was in the city, Tom spent $50 to attend a
half-day business symposium. He also paid $200 for airfare, $50 for meals during the symposium, and $20 on cab fare to
the symposium.
Required:
1. Compute Tom’s net business income for tax purposes for the year.

Answer 1