Business 8
Employee Expenses
Solutions to Cumulative Problems
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Solutions to Tax Research Problems
8-41 Section 162(a) provides that, in general, a taxpayer shall be allowed to deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Subsection 162(a)(2) states that such deductible expenses include "travelling expenses (including amounts expended for meals and lodging) while away from home in the pursuit of a trade or business." The critical language of the statute is the phrase "while away from home," inasmuch as the taxpayer must be away from his "tax home" in order to deduct such expenses for travel, meals, and lodging incurred in the pursuit of a trade or business. The courts have approached this problem by inquiring whether the expenses incurred by the taxpayer arose because of some reason personal to the taxpayer (i.e., taxpayer maintains a residence that requires him to travel long distances to his main income-producing activity, thereby necessitating meals and lodging away from his residence that might be 162 deductions.) The courts also look to whether the costs of travel, meals, and lodging are unnecessary and inappropriate to the conduct of his employer's business. One of the first cases dealing with this issue was Commissioner vs. Flowers, 46-1 USTC {9127, 34 AFTR 301, 326 U.S. 465 (1946), in which the U.S. Supreme Court abstracted three conditions from 162(a) which the taxpayer must satisfy to deduct travel expenses. They are (1) the expenses must be reasonable and necessary; (2) the expenses must be incurred while away from home, and (3) the expenses must be incurred in pursuit of business. Failure to satisfy any one of the three conditions bars the travel expense deduction. The Court did not address the issue of "tax home" in this case. In Schreiner vs. McCrory, 60-2 USTC {9677, 6 AFTR 2d 5545, 186 F. Supp. 819 (D. Neb. 1960), the taxpayer was employed by an insurance company based in Omaha, Nebraska where the taxpayer also resided. The taxpayer was assigned a sales territory that included Nebraska and Colorado. The taxpayer spent a great deal of time in Denver, Colorado and earned the greater portion of his income in that city. The taxpayer maintained no office or similar place of business in Denver. The taxpayer sought to deduct his travel expenses relating to his employment. The IRS contended that the taxpayer's "tax home" was in Denver, despite his residence in Omaha. The U.S. District Court disagreed and found Omaha to be the taxpayer's "tax home," thus allowing the deduction for travel expenses. The Court stated that to find otherwise would impose on a salesman a penalty whereby he would be burdened with the cost of two homes: one where his family lives and the other a "tax home" designated by the government on the basis of time spent and money earned there. In Bunewith vs. Commissioner, 52 TC 837 (1969), aff'd in an unreported memorandum and order, 70-1 USTC {9414, 25 AFTR 2d 70-935 (CA-1, 1970), the taxpayer resided outside of his work area and commuted back and forth to his various work areas in Massachusetts. The court did not include the term "tax home" in its opinion, which disallowed the taxpayer's deduction for travel expenses. However, the
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court stated that the taxpayer's expenses were incurred for personal reasons (i.e., his desire not to relocate closer to his work areas), and they were as unnecessary and inappropriate to the conduct of the trade or business of the taxpayer's employer as were any other personal living expenses at his residence. In Lee E. Daly and Rosemarie H. Daly vs. Commissioner, 82-1 USTC {9721, 48 AFTR 2d 81-6008, 662 F.2d 253 (4th Cir. 1981), aff'g. TC and rev'ing after rehearing en banc the case of 80-2 USTC {9719, 46 AFTR 2d 80-5851, 631 F.2d 361 (4th Cir. 1980), the court used both the concept of "tax home" and whether expenses were personal and unnecessary and inappropriate to the conduct of his employer's business to disallow the taxpayer's deduction for travel expenses. The taxpayer lived in McLean, Virginia with his wife who was employed in nearby Washington, D.C. The taxpayer chose to take a job in which he produced most of his income in Philadelphia; the taxpayer did not maintain an office in Philadelphia, and the taxpayer's sales territory did not include his residence. The Tax Court had originally found that Philadelphia was the taxpayer's "tax home" for 161(a) purposes and the deductibility of his travel, meals, and lodging must be determined with Philadelphia as the point of departure instead of McLean, Virginia. This finding was originally reversed by the U.S. Court of Appeals for the Fourth Circuit, but upon a petition to rehear the case, the Fourth Circuit reheard the appeal and reversed its earlier decision, thus affirming the Tax Court decision. In a concurring opinion, Judge Murnaghan agreed with the result of the case, but thought that Congress should deal with the issue in which one spouse's situation (e.g., here taxpayer's wife and her employment situs) plays a significant role in determining the situs of the other spouse's "tax home." Applying the case law to the facts in the problem, it is noteworthy that M need only cross a bridge to reach his sales territory; thus, M's position is arguably tantamount to living in his territory. Also noteworthy is that M's wife is employed in Cincinnati. In light of Judge Murnaghan's concurring opinion in the Daly case, supra, this gives M a significant reason for residing there. Finally, M does not maintain an office in Louisville, although he obviously spends a great deal of time there in income-producing activities. M's situation seems to closely follow the pattern in Daly, except for the taxpayer's close proximity of his residence to his sales territory. If M could construct an argument that would distinguish his situation from Daly based on the close proximity of his residence to his sales territory, M might find support from Schreiner, supra. M should seek to convince the court that Cincinnati is as reasonable a place to live to serve his employer's business as is Louisville, and thus his "tax home" should be Cincinnati. M would need to show that he did not live in Cincinnati and travel to Louisville merely for personal reasons and that his travel to Louisville is necessary and appropriate to conduct of his employer's business. However, Bunewith, supra, where the deduction was denied to a taxpayer who lived outside of his work territory, coupled with the more recent Daly decision, could pose a threat to M's ability to take a travel expense deduction using Cincinnati instead of Louisville as the point of departure. The Daly decision focused not only on establishing a "tax home" for the taxpayer where he made most of his income, but also showed that the court will closely scrutinize the situation to disallow the deduction when the taxpayer's travel is motivated by personal reasons which the law deems irrelevant. Moreover, Judge Murnaghan in his concurring opinion to Daly argued that the plight of two-earner spouses, where one's situation has a significant influence on the other's tax home, is a matter for Congress to resolve. The cases indicate that the courts are reluctant to delve into areas properly resolved by legislation. Thus, in light of the similarity of the facts of the problem to Daly, M will probably not be allowed travel expense deductions for trips to Louisville, as that city will be deemed M's "tax home" for 162(a)(2) purposes. In order for R to claim a deduction for the payments to his employees, the expenses must first meet the general requirements imposed on all potential business deductions under 162. This provision allows a deduction for all the ordinary and necessary expenses incurred in carrying on a trade or business. Although this three prong test seems innocuous enough in this situation, these initial requirements must be considered. The basic provisions of 162 have been the subject of countless court cases. Generally, an expense is ordinary if it is normally incurred in the type of business in which the taxpayer is involved. In this case, R would be required to demonstrate that someone in the same line of work could reasonably be expected to incur a similar expense. In order for an expense to be necessary the expense must be appropriate, helpful, or capable of making a contribution to the taxpayer's business. Finally, R must show that the proper nexus exists between the expenses and R's trade or business. Neither the Code nor the Regulations give any particular guidance for determining whether R's payments are in fact ordinary. However, several court cases have considered the treatment of expenses similar to R's. In Harold A. Christensen 17 T.C. 1456 (1952) the court examined the situation of an employee for Parke Davis Company, a corporation that manufactured medicines and related products. The taxpayer was a field manager with responsibility for all or parts of six states and 15 salesmen that covered this area. Mr. Christensen's compensation consisted of a fixed salary, plus a bonus of five percent of the average increase in the sales made by the salesmen under him. During the years in question, the taxpayer spent his own money on salesmen and their families in an effort to bring about and maintain good business relations between those salesmen and himself so that the business of his employer might prosper and his own
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earnings increase. He was not required by his employer to make the expenditures for his salesman, but made them entirely on his own initiative. With little analysis, the Tax Court held that at least a portion of the expenses could be regarded as ordinary and necessary expenses of the business of a field manager. However, a skeptical reading of the brief opinion might suggest that the result may have differed had the taxpayer's compensation not been directly tied to the work of those under him. The facts in R's case do not indicate whether R's compensation is directly dependent on his division's profitability, and, therefore, the productivity of those he supervised. Nevertheless, it would seem that R's compensation and performance evaluation ultimately depended on his unit's success regardless of whether any direct relationship was present in Christensen. Cases following Christensen tend to cloud the issue. In Robert B. Richardson TC Memo 1978-332, the taxpayer had over a period of years worked for an insurance company as vice president, president, and general manager. During his employment, the taxpayer created the atmosphere of a "family business" creating a personal relationship with officers, agents, employees, stockholders, and policy-owners of the company. This was accomplished primarily by gifts and entertainment. In considering the deduction of such gifts, the court explained that a corporate officer may deduct unreimbursed expenses actually paid by him as ordinary and necessary expenses of his business as a corporate executive if the corporate officer is required to incur entertainment expenses or make gifts in the course of discharging his executive duties. Relying on a series of cases (Deputy v. DuPont, 308 U.S. 488, AFTR 808, (1940), Burnet v. Clark, 287 U.S. 410, 11 AFTR 1103 (1932), Jergens v. Comm., 17 T.C. 806 (1951)), the court noted that in order for the expenses to be deductible the taxpayer must show that the expenses were made pursuant to corporate policy requiring or expecting him to bear such expenses. Moreover, the court indicated that reimbursement for such expenses or a corporate resolution requiring the assumption of such expenses would tend to show that the expenses were a necessary expense of the office. Although the court ultimately determined that expenses incurred before the taxpayer had been chairman would have been deductible under this rationale, the taxpayer had not proven that expenses made after the taxpayer had become chairman were either required or expected of him. The decision in Richardson does not cast favorable light on R's situation. The facts of the case do not suggest that R is required to make such gifts. Although such a requirement would be implied in a reimbursement arrangement, none apparently existed. The payments were completely voluntary on R's part. He received no directive from his employer telling him such expenses were either required or expected. A strict reading of the Richardson case would seem to prohibit R's deductions. In James B. Walliser 72 T.C. 433, the taxpayer was in a position somewhat similar to R's. Walliser was a bank officer responsible for marketing loans. For several years, he participated in vacation tours attended primarily by builders and deducted the related costs. He participated in such tours to build social relationships with the builders to help generate loan business which in turn helped him meet his assigned loan production quotas and obtain increases in his salary. For several years, Walliser's employer had paid for him to participate in the builder's tours but budget cutbacks required the company to stop the reimbursement of this and other expenses. However, Walliser was given leave with pay, in addition to his normal two-week paid vacation, in order to participate in the tours. Upon consideration of these facts, the court concluded that such expenses were deductible. The court, citing the result in Christensen, indicated that "where a corporate officer personally incurs expenditures which enable him to better perform his duties to the corporation and which have a direct bearing on the amount of his compensation or his chances for advancement may be deductible under 162." Nevertheless, the court denied the Walliser's deduction in light of the limitations imposed on entertainment expenses contained in 274. Noting that the expenses were in the nature of entertainment, the court explained that such expenses are not deductible where their primary purpose is to simply generate goodwill. Although the facts in R's case bear only remote resemblance to Walliser's, the court's decision would appear to help support R's deduction. The Walliser decision in relying on Christensen emphasizes the importance of that 30-year-old decision which holds that gifts to employees from another employee do satisfy the ordinary and necessary criteria. Unfortunately, the Richardson decision and others like it that indicate that the employee must be required or expected to make such expenditure cloud the issue. It should be noted that R would not automatically be entitled to a limited deduction for the payments as business gifts. Section 274 allows a deduction for business gifts where there is a reasonable expectation of a commensurate financial return. This requirement rarely raises any difficulty in the case of gifts to customers. Indeed, all of 274 is couched in terms of entertaining customers rather than employees. In R's case, the payments were to his fellow employees. In such case, the IRS may balk. It seems more reasonable to assume, however, that a de minimis amount such as the $25 deduction approved by the Code would be allowed. Note that R would much prefer deducting the expenses as an ordinary and necessary business to being subject to the $25 limitation.
8
Employee Business Expenses
Test Bank
True or False
1. L is currently an accountant with a large public accounting firm. This year he paid $800 to take a review course to prepare him for the C.P.A. exam. Because L passed the exam, he was promoted to a position open only to certified public accountants. He may deduct the cost of the review course. 2. K is an instructor of European history at High School 101. During the summer she traveled to France, taking slides that she will use in her class. K may deduct the cost of traveling to Europe as an education or business expense. 3. F, a landscape architect for an urban firm, commutes seven miles to her office. She is transferred to a branch office and must now commute 32 miles from home. If she moves to the suburbs, she will have moved 43 miles. She can deduct her moving expenses. 4. T, who graduated from the University of Illinois in June, moved 150 miles to take a job in Chicago that began in September of that year. Because he was not previously employed, he cannot deduct moving expenses this year. 5. E moved from Detroit to Beverly Hills to accept a new job as a detective with the Los Angeles Police Department. During the trip to Los Angeles he spent $100 on meals and $400 on lodging. E may deduct $500. 6. H, a famous television talk show host, moved from New York to Los Angeles this year. As part of the move she paid $500 for meals. All of the costs of her moving expenses, including her meals, were reimbursed by her employer. H may deduct $500 as an itemized deduction. 7. S is employed by Clips, a large discount office supply store. She spends most of her time on the road, seeing customers. The company does not provide her with an office so she has set up a home office. She uses her home office about 10 hours a week to write-up orders, receive and return phone calls (obviously a critical part of her job), and shuffle paper. Based on the IRS's interpretation of the Soliman decision, S would be allowed a deduction for her home office. 8. L leases a car that he uses primarily for business. L may not elect to use the standard mileage rate to account for his automobile expenses.
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9. R, a salesman for a drug company, owns a car, which he uses primarily for business. Last year he computed his auto expense deduction using actual expenses. This year, he can simplify his bookkeeping by using the standard mileage rate. 10. V is a district supervisor for several grocery stores. He is a native of Indianapolis and maintains his residence there. His primary responsibility, however, is for Louisville and the surrounding area. V spends virtually all of his time working in the Louisville area. While working in and around Louisville he incurred the following expenses: BW Motel, $1,250; ZK Motel, $1,400; LL Motel, $750 (total motel expense $3,400), and meals, $200. If V is audited, a deduction for the meals and lodging would be allowed. A taxpayer who travels within the U.S. generally may deduct all of his transportation expenses for a trip that is primarily for business, and an allocable portion of such transportation expenses when some business is conducted. On instructions from his employer, Z traveled from Atlanta to London on a business trip. Z had no desire for a vacation at that time. Z flew round-trip at a cost of $570. Once in London, though, he decided to do some sight-seeing. As a result, he conducted business on five days and engaged in personal activities for three days. Z can deduct only a portion of the travel costs to and from London. K, a professor of accounting at the University of Cincinnati, often teaches continuing education courses for the AICPA. This year she taught a tax update session in Scottsdale. She invited her husband, L, to come along, so the couple flew out to Arizona. L helped her prepare transparencies and flip-charts for her presentation. The cost of L's flight to Scottsdale is not deductible regardless of the nature and relevance of his contribution to K's work because the cost is not related to his own trade or business. Taxpayers may deduct the cost of a business meal for a client as long as the surroundings are conducive to a business discussion. A business discussion need not transpire before, after, or during the meal. D can deduct expenses for a meal when D's client meets with her attorney to discuss a proposed transaction with her company, even though she is not present at the restaurant. Taxpayer B is the president and sole shareholder of XYZ Corporation, which has six employees. The corporation may deduct the cost of a hunting lodge as long as it is primarily used by the employees. While in Chicago, S took her best customer to a Cubs game. In determining the amount of deductible entertainment expenses, the amount subject to limitation includes the cost of the entertainment, meals, taxes, tips, parking, and transportation to the event. D is employed by MH&G public accountants. While at an out-of-town continuing education course held by the firm, he incurred meal expenses that were less than the amount he was reimbursed. D is reimbursed under a per diem scheme that provides for reimbursements not greater than certain amounts prescribed by the IRS. D must return the excess for the reimbursement arrangement to qualify as an accountable plan.
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Multiple Choice
19.
B works for AC Manufacturing Co. as a janitor. Due to new federal regulations regarding plant safety, AC has required that all janitors take a night class in occupational safety at a local trade school. Although B would be happy to take the class and keep his current position, he has learned that by completing the course he will be eligible to be considered for a supervisory janitor position. B wants to deduct the cost of attending the night school class, which is not reimbursed to him. Ignoring the special deduction for qualified tuition, which statement best describes the deductibility of the cost?
Test Bank
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a. b. c. d. 20.
B may not deduct the cost of the night school class if the supervisory position is considered a change in duties. B may not deduct the cost of the night school class if it is not necessary to meet the minimum educational requirements of B's trade or business. B may not deduct the cost if the education qualifies B for a new trade or business. B may not deduct the cost if the education merely maintains his current skills.
The costs of which one of the following are valid deductible educational expenses? (Ignore the special deduction for qualified tuition) a. b. c. d. A college or vocational course necessary to be considered for a job A professional continuing educational program that qualifies the taxpayer for a new job Professional development courses required by an employer for retaining a position A tax seminar attended for reasons unrelated to one's present job
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Which one of the following would qualify, at least in part, as a deductible educational expense? a. b. c. d. The cost of transportation between home and school on a nonworking day Transportation between work and school on a working day Both of the above Neither of the above
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M works for MND Corporation, whose headquarters are in downtown Houston. The firm reassigned M to the real estate division, Woodacres, whose offices are in a nearby suburb, Conroe. The distance between the two jobsites is 43 miles. While M was working downtown it was 4 miles from his home to the office but the Woodacres office was 40 miles from M's home. M decided that 40 miles was too far to commute, so early in 2011 he moved 25 miles to a new house that was 19 miles from the Woodacres jobsite and 29 miles from the downtown jobsite. The travel distance that determines whether or not M's moving expenses are deductible is a. b. c. d. e. 19 25 36 40 43
23.
The moving expense provisions are designed to ensure that deductions are granted only when expenses arise from business concerns. Which one of the following statements most correctly describes the operation of the rules governing moving expenses? a. b. c. d. A deduction is denied unless the taxpayer moves more than some predetermined amount from his former residence. A deduction is denied unless the taxpayer's commute, absent the move, would have increased by more than some predetermined amount. A deduction is granted as long as a taxpayer's move is attributable to a job change. A deduction is granted if the taxpayer obtains either part-time or full-time employment at the new job site.
24.
J, a native Texan, graduated in June from Notre Dame University in Indiana, and obtained a job with a public accounting firm in Dallas. He began work on September 1. Before he started work, J fell in love with K, who had accepted a job in San Francisco. Shortly after J began work, the couple decided to get married. J left his job on March 1 of the following year and obtained employment two weeks later in San Francisco. He continued to be employed in the same job the remainder of the year. Which of the following statements is true regarding the expenses J incurred in moving to Dallas from Notre Dame? a. b. c. d. e. No deduction is allowed since this is J's first job. A deduction is allowed if J left Dallas because he quit his job. A deduction is allowed if J's leaving Dallas was because of a transfer by his employer to a branch of the firm in San Francisco. No deduction is allowed if J did not have a job before moving to Dallas. None of the above statements is true.
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25.
F, a news reporter, switched jobs and began working for station KNEE in San Diego, California on January 1. Four scenarios are given below. Assuming F otherwise qualifies for the moving expense deduction for expenses incurred to move to San Diego, in which of the following cases would the deduction be allowed? 1. 2. 3. 4. F worked 16 weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he went to work for another local station, where he worked for 22 weeks before the end of his first year in San Diego. F worked eight weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he found work for another network in San Diego, where he worked for 42 weeks before the end of his first year in San Diego. F worked 42 weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he found work for another network in San Diego, where he worked for 10 weeks before the end of his first year in San Diego. F worked 17 weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he found work for another network 500 miles away in San Francisco, California, where he worked for 30 weeks before the end of his first year in California. 1., 2. and 3. 1., 2., 3. and 4. 2. and 3. 2., 3. and 4. 3.
a. b. c. d. e. 26.
R and S moved 1,400 miles from Bartlesville, Oklahoma to Boston, Massachusetts. Assuming the couple qualifies for the moving expense deduction, which of the following is not deductible at least in part? a. b. c. d. e. Forfeited security deposit for early termination of lease in Oklahoma Real estate commission to obtain a new apartment in Massachusetts Cost of second trip to Boston to find a house Meals at the temporary residence in Boston None of the above is deductible
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J graduated from the University of Texas during the current year and accepted a job in Kansas City. J lived in Austin and moved to Kansas City to commence work on June 1. J drove 700 miles pulling a trailer with all of his belongings. J had rented the trailer for $200. On June 1 he moved into an apartment and lived there temporarily at a cost of $10 per day through July 15. On July 16 he moved into his new house. J will be able to claim a moving expense deduction of a. b. c. d. e. $0 $333 $200 $632 $782
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C obtained a new job in Alaska with H&J Engineering. She incurred following the moving expenses: Transportation of furniture and household goods House-hunting trip Attorney's fees on sale of former residence $1,000 1,900 1,400
Assuming C is eligible to deduct her moving expenses, what is the amount of the deduction? a. b. c. d. e. $1,000 $2,900 $3,400 $3,900 $4,400
Test Bank
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29.
An aggressive young attorney is an employee of a small law firm that provides him with an adequate office. He uses the den in his home to prepare legal briefs and review legal documents related to his employment. Assuming the attorney lives near the firm's office and he has easy access to the office at all times, which of the following statements most accurately describes the deductibility of the home office expenses incurred by the attorney? a. b. c. d. e. If the den is used exclusively for business purposes, the expenses are deductible. If the den is used exclusively for business purposes on a regular basis, the expenses are deductible. If the den is used exclusively for business purposes on a regular basis to work for and see clients, the expenses are deductible. In this situation the expenses are not deductible. The home office deduction was completely eliminated as a result of the Tax Reform Act of 1976.
30.
Which of the following statements regarding deductions for home office expenses is true? a. b. c. d. e. Deductions may be taken only if the home office is used for the taxpayer's main business. Deductions may be taken if the home office is used regularly for meeting clients or customers in the normal course of the taxpayer's business. Deductions may not be claimed if the taxpayer merely performs administrative tasks related to his business in the home office. All of above are true. None of the above is true.
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T's employer provides an office for her in its downtown headquarters. Which of the following is true? a. b. c. d. T maintains an office in her home that she uses to conduct work related to her rental property. Even though the rental activities may be considered a business, no deduction can be allowed because T's principal business is that of being an employee and its primary location is downtown. T regularly meets with clients of her employer's business in her home office, which is exclusively used for such purpose. T is entitled to the home office deduction without further inquiry. T maintains a home office that is exclusively used on a regular basis to conduct work regarding her investment portfolio. No deduction is allowed. None of the statements above is true.
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K exclusively uses a portion of his bedroom as a place to manage his few investments. He charts his stocks daily. Costs allowable to the home office are $1,000. Gross income from his investments is $800, while his A.G.I., including the investment income, is $30,000. The amount K may deduct from his A.G.I. is a. b. c. d. e. $0 $200 for A.G.I. $400 for A.G.I. $800 from A.G.I. $1,000 from A.G.I.
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Which one of the following statements is true? a. b. c. The expenses of commuting are personal, and as such are never deductible regardless of the surrounding circumstances. The expenses of commuting from Job A to Job B are deductible to the extent that the distance between Jobs A and B does not exceed the distance from home to Job A. The expenses of commuting to a temporary assignment and returning the same day when the temporary assignment is outside the vicinity in which the taxpayer conducts his business (the tax home) are deductible and are determined based on the cost of transportation from the employee's office to the temporary location. Both b. and c. are true. All are false.
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34.
T sold textbooks for a living by visiting different teaching institutions and showing samples of various books to professors. She typically carried about 100 books in her Volkswagen on her way from home to various local universities that she regularly called upon. Last year a sudden increase in the number of textbooks revised caused T to increase her quantity of samples from 100 to 300 books. To carry all of the books, T rented a trailer that she pulled behind her Volkswagen. T sought to deduct the cost of the trailer on her tax return. T will a. b. c. d. Be allowed to deduct the cost of the trailer as an additional cost attributable to carrying the items that T needs for the cost of doing business normally Not be allowed to deduct the cost of the trailer. However, T could have deducted the additional cost of hauling the new books if she had bought a larger car and used the "same mode" of transporting them as before Not be allowed to deduct the cost of the trailer because T is still essentially using the "same mode" of hauling books as before, i.e., with a car Be allowed to deduct the cost of renting the trailer because she is not using the "same mode" of hauling the new books that she used for the old ones
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R is employed as a painter for Painting-We-R. He lives in Dallas and works on jobs in the surrounding area. 1. 2. 3. R is assigned to a job in Ft. Worth for one week, causing him to commute daily a total of 80 miles, which is 60 miles further than his normal commute. R may deduct the cost of commuting 80 miles. R travels 100 miles to Waco for a two-day job and stays overnight. He may deduct, at least in part, the costs of his own meals while there. R carries a few tools in his light duty truck including paint brushes, paint, a ladder, and the like. Assuming R would drive the truck with or without the tools, he is allowed to deduct the costs of commuting under the IRS view.
Which set of the above statements is true? a. b. c. d. e. 36. 1. and 2. 1., 2. and 3. 2. 2. and 3. 3.
Which statement concerning deductible transportation costs is true? a. b. c. d. e. B drives 20 miles to his office, then later in the day drives to meet a client at the client's office. By the time he gets home that night he has driven 63 miles. He can deduct the cost of driving 23 miles. F, an architect, usually drives 40 miles round trip from home to office. Today, she skips the office and drives directly to a job site to inspect the construction. Her round trip is 50 miles. She may deduct a cost of 50 miles. M, a contractor, works out of her home. She may deduct the cost of driving to a client's place of business. More than one answer is true. All are true.
37.
J.B., a self-employed taxpayer, acquired a car this year and uses the standard mileage method to compute her deduction for automobile expenses. During the year, J.B. drove 50,000 miles: 40,000 for business and 10,000 for personal purposes. Other expenses related to the car that she has brought to her tax advisor's attention include insurance of $400, parking on business calls of $50, and interest on debt incurred to purchase the car of $1,000. What is J.B.'s deduction for automobile expenses (assume the mileage rate is .50 cents per mile for all units)? a. b. c. d. e. $20,050 $20,850 $23,250 $21,160 Some other amount
Test Bank
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38.
R coaches the basketball team at Houston High School. In preparation for the state playoffs he decided to scout his probable opponent, which was playing in San Antonio. On Friday afternoon, he left from school and drove to San Antonio to watch the game. Later that night he returned to school to work on plans for the upcoming game. He incurred the following costs: transportation, $25; meals, $5. The costs were not reimbursed. The coach may deduct a. b. c. d. e. $20 $24 $25 $29 $30
39.
S maintains a principal residence in St. Louis, Missouri. He lays brick for a living. S's employer asked him to go to Chicago, Illinois to work on a single job for six months. Due to difficulties with weather, S was forced to stay in Chicago for a total of 11 months. S wants to deduct a portion of the cost of meals and lodging in Chicago while on the job. S will be a. b. c. d. Denied the deduction because the job in Chicago was only a temporary assignment Allowed the deduction because the job in Chicago will be considered temporary, as it was not an indefinite assignment Allowed the deduction because the job in Chicago will be considered indefinite, as it was not a temporary assignment Denied the deduction because living expenses are always nondeductible personal expenses
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L flew from Chicago to Miami primarily for a business meeting. The meeting lasted three days, so she stayed in Miami for two additional days to enjoy the sunshine and visit. With respect to the plane fare for the trip, L should a. b. c. d. e. Prorate the plane fare based on time devoted to business and personal activities and deduct the business portion Divide the plane fare equally between business and personal activities and deduct the business portion Deduct the entire plane fare Deduct none of the plane fare None of the above
41.
R, a museum director, timed a business trip to Egypt to coincide with a trip to the Pyramids organized by her college's Alumni Association. She spent 14 days on business and seven days sight-seeing at the Pyramids. Air fare was $1,500, and lodging plus 50 percent of R's meal costs totaled $75 a day. She can deduct a. b. c. d. $1,000 $1,050 $2,050 $3,050
42.
Which of the following conditions must be satisfied to establish that an entertainment expense was directly related to business? a. b. c. d. e. More than a general expectation of deriving some income (other than good will) existed as a result of making the expenditure. Business was actually discussed or engaged in during the entertainment. The combined business and entertainment was principally characterized as business. More than one but not all of above must be satisfied. All of the above must be satisfied.
8-24
Chapter 8
Employee Business Expenses
43.
D owns and operates her own real estate business. She loves to entertain. Indicate which of the following statements is true. Assume the expenditure is deductible unless otherwise implied. a. b. c. d. e. D takes her new neighbor to the ball game. The expense is deductible, assuming D's entertainment expense creates goodwill that may lead the individual to become D's client if and when he decides to sell his house. D takes a prospective client to the theater. Unless the taxpayer can prove otherwise, the IRS presumes the expense is not deductible because the nature of the event precludes business discussion. D holds a golf outing for all of her employees. D may deduct the expense, assuming it is primarily for her employees. More than one but less than all of the statements above are true. None of the statements above is true.
44.
G operates his own public accounting firm in Los Angeles. K, an accounting professor at UCLA, often refers prospective clients to G, as well as students who might be good employees. Which of the following statements is true? a. b. c. d. e. G gave K two tickets to the Dodger game worth a total of $20 for his referrals during the year. A portion of the cost of the tickets is deductible even though he does not accompany K to the game and discuss business. G met K downtown for lunch. They discussed some prospective clients, then played tennis. G may deduct the cost of the lunch as well as the cost of playing tennis. G takes K to sail on his boat. G never gets on his boat without a business associate. G may deduct the depreciation on the boat. More than one but less than all of the statements above are true. None of the statements above is true.
45.
When J became a partner in the public accounting firm of PL&A, he was required to obtain a membership at a country club. During the year, he spent $5,000 for dues. His records indicate that he used the club as follows: Business meals Substantial business discussions at the office followed by golf at the club Personal use J. may deduct dues of a. b. c. d. e. $0 $800 $1,600 $2,800 $4,000 40 days 100 days 60 days
46.
In which case are expenses not deductible on account of the directly-related-to and associated-with tests for entertainment expense? a. b. c. d. e. Meal expense for client J and spouse at a business lunch Cost of seven kegs of beer and 200 hot dogs for the annual company picnic for employees and their families Cost of wine and cheese to be distributed free to guests and prospective buyers at a gallery opening Cost of a two-week vacation trip to Hawaii for the company's top salesperson, who reports the value of the trip as taxable compensation All of the above are deductible.
Test Bank
8-25
47.
B is a computer systems analyst for IBM Corporation living and working in Dayton, Ohio. During the year, she drove to Cincinnati to help C with problems he was having on a recently purchased system. B spent the night in Cincinnati and ate by herself, spending $30 for dinner including $4 for a tip and $1 in tax. Under her per diem arrangement, she was reimbursed $20 for her meal. B's deduction, before application of the 2 percent of A.G.I. limitation for miscellaneous itemized deductions, is a. b. c. d. e. $20 $24 $25 $28 $30
48.
R, an employee, spends $2,500 on business entertainment for which he is not reimbursed. If his A.G.I. is $60,000 (assuming no other miscellaneous itemized deductions), his deduction would be a. b. c. d. e. $50 $100 $200 $800 None of the above
49.
At a business lunch to entertain a new client, J spent $40 for the meal, $4 tax, $6 tip, and $10 cab fare. Assuming he is not reimbursed, what is the allowable deduction? a. b. c. d. e. $0 $25 $30 $44 Some other amount
50.
After securing a large order of magic supplies, Q took his customer to lunch. He paid $40, for which his company, Novelties, Inc., reimbursed him. Which statement is true? a. b. c. d. e. Q may deduct $20. Q includes $40 as income and deducts the entire amount. Novelties, Inc. may deduct $20. Novelties, Inc. may deduct $40. Both b. and c. are true.
8
Employee Business Expenses
Solutions to Test Bank
True or False
1. False. This cost is incurred to meet the minimum educational requirements of L's job. Thus no deduction is allowed. (See p. 8-4.) 2. False. Deductions for travel for educational purposes are deductible only when the travel is necessary to engage in an activity that is otherwise deductible. Merely taking slides in Europe to be used later in class does not satisfy this requirement. (See p. 8-4.) 3. False. The commute between F's old residence and new job, 32 miles, must be at least 50 miles greater than her old commute, 7 miles. In this case it is only 25 (32-7) miles. (See Example 7 and p. 8-9.) 4. False. If the taxpayer has no previous job site, the 50 mile distance test is met if the new job is 50 miles or more from his residence. (See p. 8-10.) 5. False. While all of the lodging expense is deductible as a direct moving expense, none of the meal cost is deductible. Thus, E's deduction is $400. (See p. 8-11.) 6. False. Beginning in 1994, meal expenses incurred during a move cannot be deducted. (See p. 8-11.) 7. False. Under the Soliman decision, a taxpayer is entitled to claim deductions related to a home office only if the home office is the most important place of work. The high court indicated that in applying this test the relative importance of the functions performed at each location would be evaluated as well as the amount of time spent in each location. In this case, the IRS would no doubt argue that S's most important functions are performed at the offices of her clients. Short of this, the Service would contend that S spends more time on the road and at the clients' offices than she does at home. Note, however, that S should qualify for the deduction under the administrative activities test. (See Example 10 and p. 8-14.) 8. False. Beginning in 1998, availability of the standard rate is not restricted to owners. This relaxed rule effectively allows taxpayers who lease rather than buy to use the standard rate. (See p. 8-25.) 9. False. The standard mileage rate may be used only if adopted in the first year the car is placed in service. (See p. 8-26.) 10. False. Under the IRS view, Louisville is considered V's tax home because that is his principal place of business. Because he is not away from his tax home, the IRS would deny his deduction for meals and lodging. (See Example 27 and pp. 8-26 and 8-27.)
8-27
8-28
Chapter 8
Employee Business Expenses
11.
False. In the case of domestic travel, the taxpayer either deducts all transportation expenses or none of them; no allocation is allowed. However, any travel expenses directly related to business after arriving at the destination qualify. (See Example 30 and p. 8-29.) False. Because Z had no desire for a vacation and the primary reason for the trip was business, the entire to-and-from travel costs are deductible. (See Example 34 and pp. 8-30 and 8-31.) True. L's travel expenses would be deductible only if (1) he were an employee of the person paying (or reimbursing) the expenses, (2) he had a bona fide business purpose for the travel, and (3) the expenses were otherwise deductible. (See Example 33 and p. 8-30.) False. In the case of business meals, the taxpayer must be engaged in a substantial and genuine business discussion before, after, or during the meal in order to claim a deduction. (See p. 8-36.) True. In the case of a business meal, D's attorney is considered an employee of D and a deduction is allowed, even without D's presence. (See p. 8-36.) True. A taxpayer may deduct expenses connected with entertainment facilities if such facilities are provided primarily for employees. [See p. 8-37 and 274(e)(5).] False. Transportation to the event is not subject to limitation. (See Example 42 and p. 8-38.) False. If the per diem reimbursements do not exceed the government prescribed standard, the employee is deemed to have substantiated that amount and does not need to return the excess. (See Example 47 and p. 8-47.)
12. 13.
14. 15. 16. 17. 18.
Multiple Choice
19.
c. An employee may deduct educational costs undertaken to meet requirements set by his or her employer, so long as such education does not qualify the employee for a new trade or business and is not necessary to meet the minimum educational requirements of the employee's trade or business. [See pp. 8-3 and 8-4 and Reg. 1.162-5(a).] c. The costs of courses that prepare a person for a job, provide him or her with minimum job requirements, and seminars that are not job-related do not qualify. (See pp. 8-3 and 8-4.) b. Option a. does not qualify because transportation from home to school is not deductible on a nonworking day. (See p. 8-5.) c. The distance test requires that the distance from the old home to the new job site (50 miles) exceeds the distance from the old home to the old jobsite (4 miles) by 50 miles. The distance to be compared is 36 miles (40-4). [See Example 7, p. 8-9, and 217(c)(1).] b. The distance between the taxpayer's old residence and new job site (commute absent the move) must exceed the distance between the old residence and old job site (original commute) by more than 50 miles. Item a. is false because it is the increase in the commute, absent the move, that is tested, not simply the number of miles moved. Item c. is false since the taxpayer must be employed in the same general location for 39 weeks during the 12-month period following his arrival. Item d. is false since the taxpayer must have a full-time job. (See pp. 8-9 and 8-10.) c. Under the rules governing moving expenses, the taxpayer must be employed at the general location of the new job for 39 weeks. However, this rule is waived if the taxpayer dies, becomes disabled, is involuntarily dismissed, or is transferred for the employer's benefit. Item b. is false because the waiver is not granted when the employee voluntarily quits. Item a. is false because a taxpayer is allowed to claim the moving expense deduction for the commencement of work in a new location. Item d. is false because the taxpayer is not required to have a job before moving to the new location. It is sufficient if he or she obtains a job and is employed for 39 weeks out of the 12-month period following arrival at the location of the new job. (See Example 8 and p. 8-9.)
20. 21. 22.
23.
24.
Solutions to Test Bank
8-29
25.
c. An employee must be employed in the general location of the job for 39 weeks out of the 12 months immediately following his or her arrival. It does not matter whether the taxpayer quits or is fired from the original job or works for more than one employer, as long as the total number of weeks is at least 39. In situation 1, F works only 38 weeks. In situation 4, F is not employed 39 weeks in the same general location, San Diego. (See Example 8 and p. 8-10.) e. None of the items are deductible. Only direct moving expenses are deductible. (See pp. 8-10 and 8-11.) b. [$200 [(700)($0.19/mile) =$133] $333]. (See p. 8-11.) a. C is allowed to deduct only the direct expenses related to the move: $1,000 for transportation of household goods and furniture. (See Example 9 and pp. 8-11 and 8-12.) d. To be deductible the expense must be incurred for the convenience of the employer. In this case, the office is readily available and serves no particular need of the employer. (See p. 8-14.) b. Option a. is false because any business of the taxpayer will satisfy the requirement, as long as its principal place of business is the home office. Option c. is false, because if part of the home is used for administrative tasks and there is no other location, the principal place test is not. (See pp. 8-13 through 8-16.) c. Item c. is true because the investment portfolio work does not constitute a business and no deduction would be allowed. Item a. is false because a deduction is allowed as long as the home office is the principal place of any business. Assuming the real estate activity is a business, then the home office would qualify as the principal place of business for that business. Item b. is false because T is an employee, and employees must also satisfy the convenience-of-the-employer test. (See pp. 8-13 through 8-16.) a. No deduction because the expense is not attributable to a business. (See p. 8-15.) e. Option a. is false, because there are exceptions to the rule (e.g., commuting with tools). Option b. is false; the distance may not exceed that between Job A and Job B. Option c. is false because the cost of transportation is for the distance traveled from the taxpayer's residence to the temporary location. (See Example 20 and pp. 8-19 through 8-24.) a. The taxpayer may deduct the additional cost of transporting items necessary to the normal conduct of business if she uses the "same mode" of transportation with or without the items. (See Example 16 and p. 8-20.) a. In this situation, R's tax home is in Dallas, his principal place of business. Item 1. is true because R is on a temporary assignment beyond his tax home. Note, all of the commuting is deductible, not just the additional commuting caused by the assignment. Item 2. is true because the taxpayer is allowed to deduct his meals and lodging when he is away from his tax home overnight. Item 3. is false because R's cost, using the same-mode test, is not increased when the tools are added to the truck. (See Examples 16, 20 and 27 and pp. 8-20 through 8-23.) e. Option a. is true because a taxpayer is allowed to deduct the costs of transportation between job sites. When the taxpayer drives to more than one job site during the day, the deductible costs are limited to that exceeding his normal commute. (See Example 23 and p. 8-21.) Option b. is true. Under the revised approach established by the IRS in 1990, commuting to a temporary assignment, the construction site, is deductible if the taxpayer otherwise has a regular place of business. (See Example 18 and pp. 8-19 and 8-20.) Option c. is true because the taxpayer is traveling from one job site, her residence, to another. (See Example 22 and p. 8-23.) b. Under the standard mileage method, the taxpayer may deduct 50 cents (the assumed rate) per mile for all miles (40,000 $0.50 $20,000). In addition, the taxpayer may add the business parking of $50 and an allocable portion of the interest expense of $800 ($1,000 40,000/50,000). The insurance is not allowed because it is deemed to be included in the mileage rate. Thus, the deduction is $20,850 ($20,000 $50 $800). (See Example 26 and pp. 8-25 and 8-26.)
26. 27. 28. 29. 30.
31.
32. 33.
34.
35.
36.
37.
8-30
Chapter 8
Employee Business Expenses
38. 39.
c. Only the transportation is deductible because R was not away from home overnight. Transportation is not subject to the 50-percent disallowance. (See pp. 8-18 and 8-24.) b. An employee who works on a job away from his or her tax home may deduct all incurred living expenses while away from home temporarily. An assignment is temporary if it is not indefinite (e.g., not more than a year). (See Example 27 and pp. 8-26 and 8-27.) c. The entire fare is deductible because the trip was primarily for business. (See Example 30 and pp. 8-29 and 8-30.) c. R's trip met none of the criteria for avoiding an allocation of expenses among business and personal days. Her deductible expenses equal the ratio of business days to total days (14/21) multiplied by her total travel expenses [$1,500 (21 $75) $3,075], or $2,050. (See Example 34 and pp. 8-30 and 8-31.) e. All are requirements of the directly-related-to test. (See p. 8-34.) d. Item a. is false because the taxpayer does not have any expectation of business benefit other than goodwill, i.e., the primary purpose of this entertainment is to create goodwill. The fact that the neighbor may someday in the future use D's services is too remote. Item b. is true because the IRS assumes that business cannot be actively conducted where there are substantial distractions, such as a play in progress. Item c. is true because recreational or social activities provided primarily for employees other than officers, etc., are deductible. (See Example 39 and pp. 8-33 through 8-37.) d. Item a. is true because the taxpayer could treat these as business gifts of less than $25. He could not treat them as entertainment since the taxpayer was not present. (See p. 8-40.) Item b. is true because the lunch is a quiet business meal, and the tennis followed a substantial business discussion, thus qualifying as being associated with entertainment. (See p. 8-36.) Item c. is false because no costs attributable to an entertainment facility are deductible unless provided primarily for employees. (See p. 8-37.) Note that out-of-pocket expenses provided during entertainment at an entertainment facility are deductible if they meet the directly-related-to or associated-with tests. (See p. 8-37.) a. Beginning in 1994, no portion of amounts paid for club dues or fees are deductible whether the club is used for business or pleasure. However, J can still deduct 50% of the costs of the business meals if the applicable requirements are satisfied. (See p. 8-37.) e. These are all exceptions to the directly-related-to and associated-with tests. (See p. 8-37.) c. Reimbursed expenses of business meals are fully deductible, whereas only 50 percent of unreimbursed expenses are deductible. B's deductible expenses for the meal equal $20 (100% $20) plus $5 [50% ($30 $20)], or $25. She will report $20 of income. (See Examples 41 and 42 and pp. 8-38 and 8-39.) a. R's deduction for business entertainment equals 50 percent of his unreimbursed expenses (50%$2,500 $1,250) less 2 percent of his A.G.I. [$1,250 (2% $60,000) $50]. (See Example 41 and p. 8-38.) e. All the cab fare ($10) is deductible, but only 50 percent of the $50 ($40 $4 $6) meal expense, or $25, is deductible. Thus $35 is deductible ($10 $25). (See Example 42 and pp. 8-38 and 8-39.) e. For reimbursed expenses, the taxpayer considers reimbursement as income and deducts expenses. The company is only allowed to deduct 50 percent of expenses, or $20 (50% $40). (See Example 43 and p. 8-39.)
40. 41.
42. 43.
44.
45.
46. 47.
48. 49. 50.