9--DEDUCTIONS: CHAPTER EMPLOYEE AND SELF-EMPLOYED-RELATED EXPENSES
Student: ___________________________________________________________________________
1.
One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than tasks performed). True False
2.
In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106 and Schedule C. True False
3.
Unfortunately, the IRS will not issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor. True False
4.
Jake performs services for Maude. If Jake provides his own helper and tools, this is indicative of independent contractor (rather than employee) status. True False
5.
A statutory employee is a common law employee and is subject to income tax withholdings. True False
6.
For tax purposes, a statutory employee is treated the same as a common law employee. True False
7.
A common law employee who chooses the standard deduction will be unable to claim any unreimbursed work-related expenses as a deduction. True False
8.
The work-related expenses of an independent contractor will be subject to the 2%-of-AGI floor. True False
9.
After she finishes working at her main job, Jean returns home, has dinner, then drives to her second job. Jean may deduct the mileage between her first and second jobs. True False
10. After the automatic mileage rate has been set by the IRS for a year, it can later be changed. True False
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11. In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile. True False
12. A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking. True False
13. Once the actual cost method is used, a taxpayer cannot for a later year change to the automatic mileage method. True False
14. For tax purposes, "travel" is a broader classification than "transportation." True False
15. Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was not away from home. True False
16. Janet, who lives and works in Newark, travels to Atlanta for a Thursday-Friday business conference. She stays over after the conference and visits relatives and friends on Saturday. Under certain circumstances, the meals and lodging expenses for Saturday can be considered as business related. True False
17. Marvin lives with his family in Alabama. He has two jobs: one in Alabama and one in North Carolina. Marvin's tax home is where he lives (Alabama). True False
18. A taxpayer who lives and works in Kansas City is sent to Chicago on an eight-day business trip. While in Chicago, taxpayer uses the hotel valet service to have some laundry done. The valet charge is not a deductible travel expense. True False
19. The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year. True False
20. A taxpayer who lives and works in Tulsa travels to Buffalo for five days. If three days are spent on business and two days are spent on visiting relatives, only 60% of the airfare is deductible. True False
21. Bob lives and works in Newark, NJ. He travels to London for a three-day business meeting, after which he spends six days touring Scotland. All of his air fare is deductible. True False
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22. Edna lives and works in Cleveland. She travels to Berlin for a nine-day business meeting, after which she spends four days touring Germany. All of Edna's airfare is deductible. True False
23. Daniel just graduated from college. The cost of moving his personal belongings from his parents' home to his first job site qualifies for the moving expense deduction. True False
24. Tired of her 60 mile daily commute, Margaret purchases a condo that is only five miles from her job. Margaret's moving expenses to her new condo are allowed and can be claimed by her as a deduction. True False
25. In November 2010, Katie incurs unreimbursed moving expenses to accept a new job. Katie can deduct any of these expenses when she timely files her 2010 income tax return even though she has not yet satisfied the 39-week time test. True False
26. In May 2010, after 11 months on a new job, Ken is fired after he assaults a customer. Ken must include in his gross income for 2010 any deduction for moving expenses he may have claimed on his 2009 tax return. True False
27. A moving expense deduction is not allowed if at the time of the move the taxpayer did not have a job at the new location. True False
28. Kelly, an unemployed architect, moves from Boston to Phoenix to accept a job as a chef at a restaurant. Kelly's moving expenses are deductible even though her new job is in a different trade or business. True False
29. Alexis (a CPA and JD) sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national law firm. Her moving expenses are not deductible because she has changed employment status (i.e., went from self-employed to employee) and changed occupations (i.e., practice of public accounting to practice of law). True False
30. An education expense deduction can be allowed even if the education results in a promotion or pay raise for the employee. True False
31. Lloyd, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is not deductible. True False
32. Under the right circumstances, a taxpayer's meals and lodging expense can qualify as a deductible education expense. True False
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33. A taxpayer who always claims the standard deduction (i.e., does not itemize his or her deductions from AGI) will not be able to receive a tax benefit from any education expenses incurred. True False
34. There is no cutback adjustment for meals and entertainment as to employees who are subject to regulation by the U.S. Department of Transportation. True False
35. Crow Corporation pays for a trip to Bermuda for its two top salespersons. This expense is not subject to the cutback adjustment. True False
36. Mallard Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains. The cost of operating the cafeteria is not subject to the cutback adjustment. True False
37. Every year, Penguin Corporation gives each employee a fruit basket and a bottle of wine at Christmas. These gifts are not subject to the cutback adjustment. True False
38. A taxpayer takes six clients to an NBA playoff game. If all of the tickets (list price of $120 each) are purchased on the Internet for $1,800 ($300 each), only $150 ($300 50% cutback adjustment) per ticket is deductible. True False
39. Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. None of Ethan's annual dues for his club membership are deductible. True False
40. A sole proprietor is not allowed a deduction for a $25 gift he gives to his office manager on her birthday. True False
41. In the case of an office in the home deduction, the exclusive business use test does not apply when the home is used as a daycare center. True False
42. If a taxpayer does not own a home but rents an apartment, the office in the home deduction is not available. True False
43. A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction. True False
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44. The portion of the office in the home deduction that exceeds the income from the business can be carried over to future years. True False
45. If the cost of uniforms is deductible, their maintenance cost (e.g., laundry, dry cleaning, alterations) also is deductible. True False
46. After graduating from college with a degree in chemistry, Alberto obtains a job as a chemist with DuPont. Alberto's job search expenses qualify as deductions. True False
47. Qualifying job search expenses are deductible even if the taxpayer does not change jobs. True False
48. Madison is an instructor of fine arts at a local community college. If she spends $600 on art supplies for her classes, none of this amount can be claimed as a deduction for AGI. True False
49. Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan. True False
50. When contributions are made to a traditional IRA, they are deductible by the participant. Later distributions from a the IRA, however, are fully taxed. True False
51. By itself, credit card receipts will constitute adequate substantiation for travel expenses. True False
52. The Federal per diem rates that can be used for "deemed substantiated" purposes are not the same for all locations in the country. True False
53. For self-employed taxpayers, travel expenses are not subject to the 2%-of-AGI floor. True False
54. A taxpayer who claims the standard deduction will not be affected by the 2% floor on unreimbursed employee expenses. True False
55. An employed taxpayer can avoid the cutback adjustment on entertainment expenses by claiming the standard deduction. True False
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56. Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% cutback adjustment to their employer. True False
57. Ryan performs services for Jordan. Which, if any, of the following factors indicate that Ryan is an employee, rather than an independent contractor? A. Ryan provides his own support services (e.g., work assistants). B. Ryan obtained his own training (i.e., job skills). C. Ryan is paid based on tasks performed. D. Ryan does not make his services available to others. E. None of the above. 58. Corey performs services for Sophie. Which, if any, of the following factors indicate that Corey is an independent contractor, rather than an employee? A. Corey sets the work schedule. B. Sophie provides the tools used. C. Corey files a Form 2106 with his Form 1040. D. Corey is paid by the hour. E. None of the above. 59. Which, if any, of the following factors is not a characteristic of independent contractor status? A. Services are performed for more than one party. B. Receipt of a Form W-2 reporting payments received. C. Workplace fringe benefits are not available. D. Work-related income and expenses are reported on Schedule C. E. None of the above. 60. A worker may prefer to be treated as an independent contractor (rather than an employee) for which of the following reasons: A. Avoids the cutback adjustment as to business meals. B. All of the self-employment tax is deductible for income tax purposes. C. Work-related expenses are not subject to the 2%-of-AGI floor. D. A Schedule C does not have to be filed. E. None of the above. 61. A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons: A. To avoid the self-employment tax. B. To claim unreimbursed work-related expenses as a deduction for AGI. C. To avoid the cutback adjustment on unreimbursed business entertainment expenses. D. To avoid the 2%-of-AGI floor on unreimbursed work-related expenses. E. None of the above. 62. Statutory employees: A. Report their expenses on Form 2106. B. Include common law employees. C. Are subject to income tax withholdings. D. Claim their expenses as deductions from AGI. E. None of the above.
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63. Michael is the city sales manager for "Chick-Stick," a national fast food franchise. Every working day, Michael drives his car as follows:
Home to office Office to Chick-Stick No. 1 Chick-Stick No. 1 to No. 2 Chick-Stick No. 2 to No. 3 Chick-Stick No. 3 to home Miles 20 15 18 14 30
Michael's deductible mileage is: A. 0 miles. B. 30 miles. C. 47 miles. D. 77 miles. E. None of the above. 64. Amy works as an auditor for a large major CPA firm. During the months of September through November of each year, she is permanently assigned to the team auditing Garnet Corporation. As a result, every day she drives from her home to Garnet and returns home after work. Mileage is as follows:
Home to office Home to Garnet Office to Garnet Miles 10 30 35
For these three months, Amy's deductible mileage for each workday is: A. 0. B. 30. C. 35. D. 60. E. None of the above. 65. When using the automatic mileage method, which, if any, of the following expenses also can be claimed? A. Engine tune-up. B. Parking charges. C. Gasoline. D. MACRS depreciation. E. None of the above. 66. In which, if any, of the following situations is the automatic mileage available? A. A limousine to be rented by the owner for special occasions (e.g., weddings, high school proms). B. The auto belongs to taxpayer's mother. C. One of seven cars used to deliver pizzas. D. MACRS statutory percentage method has been claimed on the automobile. E. None of the above. 67. Under the actual expense method, which, if any, of the following expenses will not be allowed? A. Parking fines incurred during business use. B. Interest expense on a car loan (taxpayer is self-employed). C. Auto insurance. D. Dues to auto clubs. E. None of the above.
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68. Bill is the regional manager for a national chain of auto-parts stores and is based in Salt Lake City. When the company opens new stores in Boise, Bill is given the task of supervising their initial operation. For three months, he works weekdays in Boise and returns home on weekends. He spends $410 returning to Salt Lake City but would have spent $390 had he stayed in Boise for the weekend. As to the weekend trips, how much, if any, qualifies as a deduction? A. $0, since the trips are personal and not work related. B. $0, since Bill's tax home has changed from Salt Lake City to Boise. C. $390. D. $410. E. None of the above. 69. Allowing for the cutback adjustment (50% reduction for meals and entertainment), which of the following trips, if any, will qualify for the travel expense deduction? A. Dr. Jones, a general dentist, attends a two-day seminar on developing a dental practice. B. Dr. Brown, a surgeon, attends a two-day seminar on financial planning. C. Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills. D. Myrna went on a two-week vacation in Boston. While there, she visited her employer's home office to have lunch with former co-workers. E. None of the above. 70. During the year, Walt went from Louisville to Hawaii on business. Preceding a five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for the trip are:
Air fare Lodging Meals Entertainment $3,200 900 800 600
Presuming no reimbursement, deductible expenses are: A. $5,500. B. $4,800. C. $3,900. D. $3,200. E. None of the above. 71. During the year, Peggy went from Nashville to Quito (Ecuador) on business. She spent four days on business, two days on travel, and four days on vacation. Disregarding the vacation costs, Peggy's unreimbursed expenses are:
Air fare Lodging Meals Entertainment $3,000 800 600 400
Peggy's deductible expenses are: A. $2,500. B. $2,800. C. $3,100. D. $4,300. E. None of the above.
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72. During the year, Oscar travels from Raleigh to Moscow (Russia) on business. His time was spent as follows: 2 days travel (one day each way), 2 days business, and 2 days personal. His expenses for the trip were as follows (meals and lodging reflect only the business portion):
Air fare Lodging Meals and entertainment $3,600 1,000 1,600
Presuming no reimbursement, Oscar's deductible expenses are: A. $1,800. B. $3,000. C. $4,200. D. $5,400. E. $6,200. 73. In terms of meeting the distance test for purposes of deducting moving expenses, which of the following statements is correct? A. The taxpayer's new job location must be at least 50 miles away from the old job. B. The taxpayer's new residence must be at least 50 miles away from the new job. C. The taxpayer's new job location must be at least 50 miles farther from the old residence than the old residence was to the old job. D. The taxpayer's new residence must be at least 50 miles away from the old residence. E. None of the above. 74. As to meeting the time test for purposes of deducting moving expenses, which of the following statements is correct? A. Work at the new location need not involve a full-time job--part-time job will suffice. B. The taxpayer has two years in which to satisfy the 39-weeks or 78-weeks requirement. C. The time test is waived for persons whose move follows retirement. D. The moving expense deduction can be claimed even though the taxpayer has not yet met the time test. E. None of the above. 75. Due to a merger, Allison transfers from Miami to Chicago. Under a new job description, she is reclassified from employee to independent contractor status. Her moving expenses, which are not reimbursed, are as follows:
Transportation Meals Lodging Cost of moving household goods Penalty for breaking lease on Miami apartment $1,400 400 500 4,000 3,000
Allison's deductible moving expense is: A. $0. B. $5,900. C. $6,100. D. $8,900. E. $9,300.
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76. Carolyn is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During 2010, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $3,900 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Carolyn has a: A. Deduction for and deduction from AGI of $0. B. Deduction for AGI of $3,900 and deduction from AGI of $700. C. Deduction for AGI of $4,000 and deduction from AGI of $600. D. Deduction for AGI of $4,100 and deduction from AGI of $500. E. None of the above. 77. The 222 deduction for tuition and related expenses is available: A. Only if the taxpayer itemizes deductions from AGI. B. To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit. C. To cover the tuition of a cousin who qualifies as taxpayer's dependent. D. Only if job related. E. None of the above. 78. The 222 deduction for tuition and related expenses is available: A. Regardless of the amount of a taxpayer's AGI. B. To cover room and board expenses to attend college. C. To a married taxpayer filing a separate return. D. Even if a taxpayer does claim the standard deduction. E. None of the above. 79. Which, if any, of the following is subject to the cutback adjustment? A. An airline pilot for an executive jet rental company who pays his own travel expenses. B. Meals provided at cost to employees by a cafeteria funded by the employer. C. Fourth of July company picnic for employees. D. Business gifts of $25 (or less). E. None of the above. 80. Henry entertains several of his key clients on January 1 of the current year. Expenses paid by Henry are as follows:
Cab fare Cover charge at supper club Dinner at club Tips to waiter $ 60 200 800 160
Presuming proper substantiation, Henry's deduction is: A. $1,220. B. $740. C. $640. D. $610. E. None of the above.
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81. Elaine, the regional sales director for a manufacturer of exercise equipment, pays $2,500 to rent a skybox for a visiting performance of the Harlem Globetrotters. The skybox holds 10 seats, and Elaine invites 7 clients to the event. Nonluxury seats range in price from $80 to $120. The refreshments provided during the event cost $600. If Elaine meets all of the requirements for deductibility (i.e., business discussion, substantiation), she may deduct: A. $1,550. B. $1,500. C. $1,260. D. $1,100. E. $900. 82. Ralph made the following business gifts during the year.
To Robert (a key client) at Christmas To Angel (Robert's 8-year old daughter) on her birthday To Art (Ralph's secretary) on his birthday ($3 was for gift wrapping) To Paige (Ralph's boss) at Christmas $50 20 30 40
Presuming proper substantiation, Ralph's deduction is: A. $53. B. $73. C. $78. D. $98. E. None of the above. 83. Which of the following expenses, if any, qualify as deductible? A. Contributions to a Coverdell Education Savings Account (CESA). B. Contributions to a qualified tuition program ( 529 plan). C. Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX). D. Contribution to H.R. 10 plan. E. None of the above. 84. Which, if any, of the following expenses is subject to the 2%-of-AGI floor? A. Qualified tuition expenses under 222. B. Contribution to traditional IRA. C. Cost of a CPA exam review course--taxpayer just began employment with an accounting firm. D. Office in the home deduction for a statutory employee. E. None of the above. 85. Which, if any, of the following expenses is subject to the 2%-of-AGI floor? A. Gambling losses (to the extent of gambling gains). B. Moving expenses (not reimbursed by employer). C. Teaching supplies (up to $250) purchased by a fifth grade teacher. D. Union dues of an employed machinist. E. None of the above. 86. Which, if any, of the following expenses are not subject to the 2%-of-AGI floor? A. Safety shoes purchased by a self-employed plumber. B. Unreimbursed employee expenses. C. Reimbursed employee expenses. Taxpayer-employee does not render an adequate accounting to the employer. D. Tax return preparation fee paid by a non-employed retiree. E. None of the above.
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87. In contrasting the reporting procedures of employees and self-employed persons regarding job-related transactions, which of the following items involve self-employed? A. Form 2106. B. Schedule C of Form 1040. C. Form W-2. D. Schedule A of Form 1040. E. None of the above. 88. One of the tax advantages of being self-employed (rather than being an employee) is: A. The self-employment tax is lower than the Social Security tax. B. The cutback adjustment does not apply. C. Job-related expenses are deductions for AGI. D. The actual cost method for deducting the business use of an automobile can be selected. E. A deduction for an office in the home is available. 89. Match the statements that relate to each other. (Note: Choice L may be used more than once.) 1. Deductible moving expense 2. Deductible job-hunting expenses 3. Safety goggles purchased by an employed carpenter 4. Deduction by an employee of unreimbursed office-in-the-home expenses 5. Characteristic of a taxpayer who is self-employed 6. Automatic mileage method 7. Nondeductible moving expense 8. Mixed (both business and pleasure) foreign travel 9. Actual cost method of determining auto expense 10. Characteristic of a taxpayer who has the status of an employee 11. Tax home has not changed 12. Education expense that is not deductible to maintain or improve existing skills Taxpayer is provided with tools and a place to work Payment for services rendered based on tasks performed Can include actual cost of gasoline Excludes use of MACRS depreciation ____ ____ ____ ____
Lodging while in route ____ Meals while in route ____ Transportation must be allocated if ____ taxpayer spends two weeks on business and one week sightseeing Paralegal obtains a law degree ____ Out-of-town job assignment is ____ temporary Must involve the same trade or ____ business Must be for the convenience of the ____ employer Correct match not provided ____
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90. Emma holds two jobs and attends graduate school on weekends. The education improves her skills, but does not qualify her for a new trade of business. Before going to the second job, she returns home for dinner. Relevant mileage is as follows?
Home to first job First job to second job Home to second job Home to university 9 miles 16 miles 14 miles 10 miles
How much of the mileage qualifies for deduction purposes?
91. Dan is employed as an auditor by a CPA firm. On most days, he commutes by auto from his home to the office (28 miles round trip). During one month, however, he has an extensive audit assignment closer to home. For this engagement, Dan drives directly from home to the client's premises and back (26 miles round trip). How much, if any, of this mileage can Dan claim as a deduction?
92. During 2010, Tracy used her car as follows: 12,000 miles (business), 2,500 miles (commuting), and 4,000 miles (personal). In addition, she spent $440 for tolls (business) and $310 for parking (business). If Tracy uses the automatic mileage method, what is the amount of her deduction?
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93. Gus uses his automobile for both business and personal use and claims the automatic mileage rate for all purposes. During 2010, his mileage was as follows:
Personal Business Qualifying moving expense Medical Charitable Qualifying education (MBA program) Miles Driven 4,000 6,000 3,000 1,000 1,000 200
How much can Gus claim for mileage?
94. Rachel lives and works in Chicago. She is the regional sales manager for a national fast-food chain. Due to unusual developments, she is compelled to work six straight weeks in the St. Louis area. Instead of spending the weekend there, she flies home every Friday night and returns early Monday morning. The cost of coming home for the weekend approximates $500. Had she stayed in St. Louis, deductible meals and lodging would have been $600. How much, if any, may Rachel deduct as to each weekend?
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95. Roberto, a self-employed patent attorney, flew from his home in Nashville to Denver, had lunch alone at the airport, conducted business in the afternoon, and returned to Nashville in the evening. His expenses were as follows:
Airfare Airport parking (Nashville) Lunch Taxis (Denver) $450 12 20 16
What is Roberto's deductible expense for the trip?
96. Nicole went to London on business. While there, she spent 60% of the time on business and 40% on vacation. How much of the air fare of $5,000 can she deduct based on the following assumptions:
a. b. Nicole was gone five days (i.e., three business and two personal). Nicole was gone five weeks (i.e., three business and two personal).
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97. Brandi moved from New York City to California to accept a better job. She incurred the following unreimbursed moving expenses:
Transportation Lodging Meals in route Penalty for breaking apartment lease Forfeiture of athletic club membership Moving company cost $4,000 500 600 2,000 400 6,000
What is Brandi's moving expense deduction?
98. After graduating from college, Dylan obtained employment in Boston. In moving from his parents' home in Wichita to Boston, Dylan incurred the following expenses:
Transportation Meals Lodging Cost of moving household goods a. b. How much may Dylan deduct as moving expense? Would any deduction be allowed if Dylan claimed the standard deduction for the year of the move? Explain. $ 700 380 420 1,500
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99. Evan is employed as an assistant manager in the furniture division of a national chain of department stores. He is a recent college graduate with a degree in marketing. During 2010, he enrolls in the evening MBA program of a local university and incurs the following expenses: tuition, $4,300; books and computer supplies, $900; transportation expense to and from the university, $350; and meals while on campus, $300. Evan is single and his annual AGI is less than $65,000. As to these expenses, what are Evan's:
a. b. Deductions for AGI? Deductions from AGI?
100.Amanda takes three key clients to a nightclub and incurs the following costs: $220 limousine rental, $360 cover charge, $720 drinks and dinner, and $150 tips. Several days after the function, Amanda mails each client a pen costing $40. The cost includes $4 for engraving of the client's name. Assuming adequate substantiation and a business justification, what is Amanda's deduction?
101.For the current football season, Rail Corporation pays $28,000 for a skybox (containing 12 seats) at Memorial Arena for eight home games. Regular nonskybox seats at each game range from $80 to $120 a seat. In October, a Rail employee and ten clients use the skybox to attend a game. The event is preceded by a bona fide business discussion, and Rail spent $810 for food and drinks during the game. What is Rail's deduction?
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102.Brian makes gifts as follows:
Recipient Mr. Brown (a client) Mrs. Brown (Mr. Brown's wife) Ms. Smith (Brian's receptionist) Mr. Jones (Brian's boss) Cost of Gift $27* 15 30 40
* Includes $2 for engraving Presuming adequate substantiation and no reimbursement, how much may Brian deduct?
103.Rocky has a full-time job as an electrical engineer for the city utility. In his spare time, Rocky repairs TV sets in the basement of his personal residence. Most of his business comes from friends and referrals from former customers, although occasionally he runs an ad in the local suburbia newspaper. Typically, the sets are dropped off at Rocky's house and later picked up by the owner when notified that the repairs have been made. The floor space of Rocky's residence is 2,500 square feet, and he estimates that 20% of this is devoted exclusively to the repair business. Gross income from the business is $12,000, while expenses (other than home office) are $5,000. Expenses relating to the residence are as follows:
Real property taxes Interest on home mortgage Operating expenses of residence Depreciation (based on 20% business use) $4,500 8,000 3,000 500
What is Rocky's net income from the repair business?
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104.In the current year, Bo accepted employment with a Kansas City law firm after graduating from law school. Her expenses for the year are listed below:
Cost of bar review course Qualified moving expenses Job hunting expenses Subscriptions to legal journals Membership dues in bar associations State bar dues $1,500 2,100 1,800 450 620 300
Since Bo worked just part of the year, her salary was only $32,100. In terms of deductions from AGI, how much does Bo have?
105.For the current year, Horton was employed as a deputy sheriff of a county. He had AGI of $50,000 and the following unreimbursed employee expenses:
Attendance at a law enforcement conference ($900 for travel and $200 for meals) Uniforms (includes $300 for laundry and dry cleaning) Professional dues and journals Contribution to sheriff's reelection campaign (highly recommended by Horton's boss) $1,100 1,000 400 400
How much of these expenses are allowed as deductions from AGI?
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106.If a business retains someone to provide services, that person may either be an employee or be self-employed (i.e., independent contractor).
a. b. What are the tax advantages to the business of having the service provider classified as self-employed? What are the advantages and disadvantages to the service provider of self-employed status?
107.In terms of income tax treatment, what is the difference between common law and statutory employees?
108.Myra's classification of those who work for her as independent contractors is being questioned by the IRS. It is the position of the IRS that these workers are really employees. What type of factors can Myra utilize to justify her classification?
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109.Christopher just purchased an automobile for $40,000 which he plans to claim 100% as being for business use. In order to take advantage of MACRS and 179, he plans to use the actual cost method for determining his deduction in the first year. In subsequent years, he will switch to the automatic mileage method. Comment on Christopher's proposed approach.
110.Once set for a year, when might the IRS change the rate for the automatic mileage method?
111.Travel status requires that the taxpayer be away from home overnight.
a. b. What does "away from home overnight" mean? What tax advantages result from being in travel status?
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112.A taxpayer has multiple jobs at different locations. What factors are considered in determining the site of his tax home?
113.How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel?
114.Concerning the deduction for moving expenses, what circumstances, if any, will excuse a taxpayer from meeting the time test of 39 or 78 weeks?
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115.A taxpayer just changed jobs and incurred unreimbursed moving expenses.
a. b. What are his (or her) options if an income tax return has to be filed before the time test is met? What happens if the moving expense deduction has been claimed and the time test is not later satisfied?
116.In terms of IRS attitude, what do the following expenses have in common?
a. b. c. Cost of a CPA exam review course. Cost of a review course for the bar exam. Cost of a law degree by a taxpayer who does not intend to practice law.
117.Regarding 222 (qualified higher education deduction for tuition and related expenses), comment on the following:
a. b. Advantages of the provision. Disadvantages and limitations of the provision.
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118.Monica has education expenses that qualify for both the lifetime learning credit and 222 (qualified higher education deduction for tuition). As neither provision covers all of her costs, she plans to use both to increase her tax savings. Is Monica's approach permissible?
119.Meg teaches the fifth grade at a local school. During 2010, she spends $1,200 for school supplies for use in her classroom. On her income tax return for 2010, some of this expense is not reported and the balance is deducted in two different places. Explain what has probably happened.
120.What originally led to the cutback adjustment? In 1997 tax legislation, Congress made certain changes to the adjustment. What were these changes and why were they made?
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121.Some transactions can qualify as either business entertainment or as a business gift. In such cases, the business entertainment classification usually predominates. However, in one situation a choice between the two is allowed. Explain.
122.There is reason to believe that many taxpayers who are eligible to claim an office in the home deduction are not doing so.
a. b. Why might this be the case? Can this problem be resolved?
123.In connection with the office in the home deduction, comment on the following:
a. b. Mixed use (i.e., business and personal) of the portion of the home allocated to business. The difference between direct and indirect expenses for deduction purposes.
25
124.In terms of the deductibility of military uniforms, comment on the difference between a member of the National Guard who is:
a. b. Activated (i.e., called to active duty). Not activated.
125.Faith just graduated from college and she needs advice on the tax treatment of the costs she incurs in connection with her first job (a loan officer at a bank). Specifically, she wants to know about the following items:
a. b. c. Job search costs. Business wardrobe cost. Moving expenses.
126.Regarding tax favored retirement plans for employees and self-employed persons, comment on the following:
a. b. c. d. e. The exclusion versus deduction approaches as to contributions by participants. Tax-free accumulation of earnings. The deferral of income tax consequences. Employee versus self-employed status. The Roth IRA approach.
26
127.Tom owns and operates a lawn maintenance company. He does not concern himself with employment taxes because he considers all the persons who work for him to be independent contractors. He bases this assumption of the fact that several of his friends who operate similar businesses follow the same approach. Comment on Tom's situation.
128.Felicia, a recent college graduate, is employed as an accountant by an oil company. She would like to continue her education and obtain a law degree. Discuss Felicia's tax status if she attends a local law school on a:
a. b. Part-time basis. Full-time basis.
129.Discuss the 2%-of-AGI floor and the 50% cutback limitation in connection with various employee expenses under the following arrangements:
a. b. c. d. The employee is not reimbursed by the employer. The employee is fully reimbursed under a nonaccountable plan. The employee is partially reimbursed under an accountable plan. The employee is fully reimbursed under an accountable plan.
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130.Ramon and Ingrid work in the field of public relations and incur sizable entertainment expenses. Ramon is employed by a consumer products company, while Ingrid is a self-employed consultant. Regarding the tax treatment of the entertainment expenses, when would:
a. b. Ramon be better off than Ingrid? Ingrid be better off than Ramon?
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CHAPTER 9--DEDUCTIONS: EMPLOYEE AND SELF-EMPLOYED-RELATED EXPENSES Key
1. One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than tasks performed). FALSE 2. In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106 and Schedule C. TRUE 3. Unfortunately, the IRS will not issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor. FALSE 4. Jake performs services for Maude. If Jake provides his own helper and tools, this is indicative of independent contractor (rather than employee) status. TRUE 5. A statutory employee is a common law employee and is subject to income tax withholdings. FALSE 6. For tax purposes, a statutory employee is treated the same as a common law employee. FALSE 7. A common law employee who chooses the standard deduction will be unable to claim any unreimbursed work-related expenses as a deduction. FALSE 8. The work-related expenses of an independent contractor will be subject to the 2%-of-AGI floor. FALSE 9. After she finishes working at her main job, Jean returns home, has dinner, then drives to her second job. Jean may deduct the mileage between her first and second jobs. TRUE 10. After the automatic mileage rate has been set by the IRS for a year, it can later be changed. TRUE 11. In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile. TRUE
1
12.
A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking. TRUE
13.
Once the actual cost method is used, a taxpayer cannot for a later year change to the automatic mileage method. FALSE
14.
For tax purposes, "travel" is a broader classification than "transportation." TRUE
15.
Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was not away from home. TRUE
16.
Janet, who lives and works in Newark, travels to Atlanta for a Thursday-Friday business conference. She stays over after the conference and visits relatives and friends on Saturday. Under certain circumstances, the meals and lodging expenses for Saturday can be considered as business related. TRUE
17.
Marvin lives with his family in Alabama. He has two jobs: one in Alabama and one in North Carolina. Marvin's tax home is where he lives (Alabama). FALSE
18.
A taxpayer who lives and works in Kansas City is sent to Chicago on an eight-day business trip. While in Chicago, taxpayer uses the hotel valet service to have some laundry done. The valet charge is not a deductible travel expense. FALSE
19.
The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year. TRUE
20.
A taxpayer who lives and works in Tulsa travels to Buffalo for five days. If three days are spent on business and two days are spent on visiting relatives, only 60% of the airfare is deductible. FALSE
21.
Bob lives and works in Newark, NJ. He travels to London for a three-day business meeting, after which he spends six days touring Scotland. All of his air fare is deductible. FALSE
22.
Edna lives and works in Cleveland. She travels to Berlin for a nine-day business meeting, after which she spends four days touring Germany. All of Edna's airfare is deductible. FALSE
2
23.
Daniel just graduated from college. The cost of moving his personal belongings from his parents' home to his first job site qualifies for the moving expense deduction. TRUE
24.
Tired of her 60 mile daily commute, Margaret purchases a condo that is only five miles from her job. Margaret's moving expenses to her new condo are allowed and can be claimed by her as a deduction. FALSE
25.
In November 2010, Katie incurs unreimbursed moving expenses to accept a new job. Katie can deduct any of these expenses when she timely files her 2010 income tax return even though she has not yet satisfied the 39-week time test. TRUE
26.
In May 2010, after 11 months on a new job, Ken is fired after he assaults a customer. Ken must include in his gross income for 2010 any deduction for moving expenses he may have claimed on his 2009 tax return. FALSE
27.
A moving expense deduction is not allowed if at the time of the move the taxpayer did not have a job at the new location. FALSE
28.
Kelly, an unemployed architect, moves from Boston to Phoenix to accept a job as a chef at a restaurant. Kelly's moving expenses are deductible even though her new job is in a different trade or business. TRUE
29.
Alexis (a CPA and JD) sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national law firm. Her moving expenses are not deductible because she has changed employment status (i.e., went from self-employed to employee) and changed occupations (i.e., practice of public accounting to practice of law). FALSE
30.
An education expense deduction can be allowed even if the education results in a promotion or pay raise for the employee. TRUE
31.
Lloyd, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is not deductible. FALSE
32.
Under the right circumstances, a taxpayer's meals and lodging expense can qualify as a deductible education expense. TRUE
3
33.
A taxpayer who always claims the standard deduction (i.e., does not itemize his or her deductions from AGI) will not be able to receive a tax benefit from any education expenses incurred. FALSE
34.
There is no cutback adjustment for meals and entertainment as to employees who are subject to regulation by the U.S. Department of Transportation. FALSE
35.
Crow Corporation pays for a trip to Bermuda for its two top salespersons. This expense is not subject to the cutback adjustment. TRUE
36.
Mallard Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains. The cost of operating the cafeteria is not subject to the cutback adjustment. TRUE
37.
Every year, Penguin Corporation gives each employee a fruit basket and a bottle of wine at Christmas. These gifts are not subject to the cutback adjustment. TRUE
38.
A taxpayer takes six clients to an NBA playoff game. If all of the tickets (list price of $120 each) are purchased on the Internet for $1,800 ($300 each), only $150 ($300 50% cutback adjustment) per ticket is deductible. FALSE
39.
Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. None of Ethan's annual dues for his club membership are deductible. TRUE
40.
A sole proprietor is not allowed a deduction for a $25 gift he gives to his office manager on her birthday. FALSE
41.
In the case of an office in the home deduction, the exclusive business use test not does apply when the home is used as a daycare center. TRUE
42.
If a taxpayer does not own a home but rents an apartment, the office in the home deduction is not available. FALSE
43.
A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction. FALSE
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44.
The portion of the office in the home deduction that exceeds the income from the business can be carried over to future years. TRUE
45.
If the cost of uniforms is deductible, their maintenance cost (e.g., laundry, dry cleaning, alterations) also is deductible. TRUE
46.
After graduating from college with a degree in chemistry, Alberto obtains a job as a chemist with DuPont. Alberto's job search expenses qualify as deductions. FALSE
47.
Qualifying job search expenses are deductible even if the taxpayer does not change jobs. TRUE
48.
Madison is an instructor of fine arts at a local community college. If she spends $600 on art supplies for her classes, none of this amount can be claimed as a deduction for AGI. TRUE
49.
Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan. TRUE
50.
When contributions are made to a traditional IRA, they are deductible by the participant. Later distributions from a the IRA, however, are fully taxed. TRUE
51.
By itself, credit card receipts will constitute adequate substantiation for travel expenses. FALSE
52.
The Federal per diem rates that can be used for "deemed substantiated" purposes are not the same for all locations in the country. TRUE
53.
For self-employed taxpayers, travel expenses are not subject to the 2%-of-AGI floor. TRUE
54.
A taxpayer who claims the standard deduction will not be affected by the 2% floor on unreimbursed employee expenses. TRUE
55.
An employed taxpayer can avoid the cutback adjustment on entertainment expenses by claiming the standard deduction. TRUE
5
56.
Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% cutback adjustment to their employer. TRUE
57.
Ryan performs services for Jordan. Which, if any, of the following factors indicate that Ryan is an employee, rather than an independent contractor? A. B. C. D. E. Ryan provides his own support services (e.g., work assistants). Ryan obtained his own training (i.e., job skills). Ryan is paid based on tasks performed. Ryan does not make his services available to others. None of the above.
58.
Corey performs services for Sophie. Which, if any, of the following factors indicate that Corey is an independent contractor, rather than an employee? A. B. C. D. E. Corey sets the work schedule. Sophie provides the tools used. Corey files a Form 2106 with his Form 1040. Corey is paid by the hour. None of the above.
59.
Which, if any, of the following factors is not a characteristic of independent contractor status? A. B. C. D. E. Services are performed for more than one party. Receipt of a Form W-2 reporting payments received. Workplace fringe benefits are not available. Work-related income and expenses are reported on Schedule C. None of the above.
60.
A worker may prefer to be treated as an independent contractor (rather than an employee) for which of the following reasons: A. B. C. D. E. Avoids the cutback adjustment as to business meals. All of the self-employment tax is deductible for income tax purposes. Work-related expenses are not subject to the 2%-of-AGI floor. A Schedule C does not have to be filed. None of the above.
61.
A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons: A. B. C. D. E. To avoid the self-employment tax. To claim unreimbursed work-related expenses as a deduction for AGI. To avoid the cutback adjustment on unreimbursed business entertainment expenses. To avoid the 2%-of-AGI floor on unreimbursed work-related expenses. None of the above.
62.
Statutory employees: A. B. C. D. E. Report their expenses on Form 2106. Include common law employees. Are subject to income tax withholdings. Claim their expenses as deductions from AGI. None of the above.
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63.
Michael is the city sales manager for "Chick-Stick," a national fast food franchise. Every working day, Michael drives his car as follows:
Home to office Office to Chick-Stick No. 1 Chick-Stick No. 1 to No. 2 Chick-Stick No. 2 to No. 3 Chick-Stick No. 3 to home Miles 20 15 18 14 30
Michael's deductible mileage is: A. B. C. D. E. 64. 0 miles. 30 miles. 47 miles. 77 miles. None of the above.
Amy works as an auditor for a large major CPA firm. During the months of September through November of each year, she is permanently assigned to the team auditing Garnet Corporation. As a result, every day she drives from her home to Garnet and returns home after work. Mileage is as follows:
Home to office Home to Garnet Office to Garnet Miles 10 30 35
For these three months, Amy's deductible mileage for each workday is: A. B. C. D. E. 65. 0. 30. 35. 60. None of the above.
When using the automatic mileage method, which, if any, of the following expenses also can be claimed? A. B. C. D. E. Engine tune-up. Parking charges. Gasoline. MACRS depreciation. None of the above.
66.
In which, if any, of the following situations is the automatic mileage available? A. B. C. D. E. A limousine to be rented by the owner for special occasions (e.g., weddings, high school proms). The auto belongs to taxpayer's mother. One of seven cars used to deliver pizzas. MACRS statutory percentage method has been claimed on the automobile. None of the above.
67.
Under the actual expense method, which, if any, of the following expenses will not be allowed? A. B. C. D. E. Parking fines incurred during business use. Interest expense on a car loan (taxpayer is self-employed). Auto insurance. Dues to auto clubs. None of the above.
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68.
Bill is the regional manager for a national chain of auto-parts stores and is based in Salt Lake City. When the company opens new stores in Boise, Bill is given the task of supervising their initial operation. For three months, he works weekdays in Boise and returns home on weekends. He spends $410 returning to Salt Lake City but would have spent $390 had he stayed in Boise for the weekend. As to the weekend trips, how much, if any, qualifies as a deduction? A. B. C. D. E. $0, since the trips are personal and not work related. $0, since Bill's tax home has changed from Salt Lake City to Boise. $390. $410. None of the above.
69.
Allowing for the cutback adjustment (50% reduction for meals and entertainment), which of the following trips, if any, will qualify for the travel expense deduction? A. Dr. Jones, a general dentist, attends a two-day seminar on developing a dental practice. B. Dr. Brown, a surgeon, attends a two-day seminar on financial planning. C. Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills. D. Myrna went on a two-week vacation in Boston. While there, she visited her employer's home office to have lunch with former co-workers. E. None of the above.
70.
During the year, Walt went from Louisville to Hawaii on business. Preceding a five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for the trip are:
Air fare Lodging Meals Entertainment $3,200 900 800 600
Presuming no reimbursement, deductible expenses are: A. B. C. D. E. 71. $5,500. $4,800. $3,900. $3,200. None of the above.
During the year, Peggy went from Nashville to Quito (Ecuador) on business. She spent four days on business, two days on travel, and four days on vacation. Disregarding the vacation costs, Peggy's unreimbursed expenses are:
Air fare Lodging Meals Entertainment $3,000 800 600 400
Peggy's deductible expenses are: A. B. C. D. E. $2,500. $2,800. $3,100. $4,300. None of the above.
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72.
During the year, Oscar travels from Raleigh to Moscow (Russia) on business. His time was spent as follows: 2 days travel (one day each way), 2 days business, and 2 days personal. His expenses for the trip were as follows (meals and lodging reflect only the business portion):
Air fare Lodging Meals and entertainment $3,600 1,000 1,600
Presuming no reimbursement, Oscar's deductible expenses are: A. B. C. D. E. 73. $1,800. $3,000. $4,200. $5,400. $6,200.
In terms of meeting the distance test for purposes of deducting moving expenses, which of the following statements is correct? A. The taxpayer's new job location must be at least 50 miles away from the old job. B. The taxpayer's new residence must be at least 50 miles away from the new job. C. The taxpayer's new job location must be at least 50 miles farther from the old residence than the old residence was to the old job. D. The taxpayer's new residence must be at least 50 miles away from the old residence. E. None of the above.
74.
As to meeting the time test for purposes of deducting moving expenses, which of the following statements is correct? A. B. C. D. Work at the new location need not involve a full-time job--part-time job will suffice. The taxpayer has two years in which to satisfy the 39-weeks or 78-weeks requirement. The time test is waived for persons whose move follows retirement. The moving expense deduction can be claimed even though the taxpayer has not yet met the time test. E. None of the above.
75.
Due to a merger, Allison transfers from Miami to Chicago. Under a new job description, she is reclassified from employee to independent contractor status. Her moving expenses, which are not reimbursed, are as follows:
Transportation Meals Lodging Cost of moving household goods Penalty for breaking lease on Miami apartment $1,400 400 500 4,000 3,000
Allison's deductible moving expense is: A. B. C. D. E. $0. $5,900. $6,100. $8,900. $9,300.
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76.
Carolyn is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During 2010, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $3,900 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Carolyn has a: A. B. C. D. E. Deduction for and deduction from AGI of $0. Deduction for AGI of $3,900 and deduction from AGI of $700. Deduction for AGI of $4,000 and deduction from AGI of $600. Deduction for AGI of $4,100 and deduction from AGI of $500. None of the above.
77.
The 222 deduction for tuition and related expenses is available: A. B. C. D. E. Only if the taxpayer itemizes deductions from AGI. To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit. To cover the tuition of a cousin who qualifies as taxpayer's dependent. Only if job related. None of the above.
78.
The 222 deduction for tuition and related expenses is available: A. B. C. D. E. Regardless of the amount of a taxpayer's AGI. To cover room and board expenses to attend college. To a married taxpayer filing a separate return. Even if a taxpayer does claim the standard deduction. None of the above.
79.
Which, if any, of the following is subject to the cutback adjustment? A. B. C. D. E. An airline pilot for an executive jet rental company who pays his own travel expenses. Meals provided at cost to employees by a cafeteria funded by the employer. Fourth of July company picnic for employees. Business gifts of $25 (or less). None of the above.
80.
Henry entertains several of his key clients on January 1 of the current year. Expenses paid by Henry are as follows:
Cab fare Cover charge at supper club Dinner at club Tips to waiter $ 60 200 800 160
Presuming proper substantiation, Henry's deduction is: A. B. C. D. E. $1,220. $740. $640. $610. None of the above.
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81.
Elaine, the regional sales director for a manufacturer of exercise equipment, pays $2,500 to rent a skybox for a visiting performance of the Harlem Globetrotters. The skybox holds 10 seats, and Elaine invites 7 clients to the event. Nonluxury seats range in price from $80 to $120. The refreshments provided during the event cost $600. If Elaine meets all of the requirements for deductibility (i.e., business discussion, substantiation), she may deduct: A. B. C. D. E. $1,550. $1,500. $1,260. $1,100. $900.
82.
Ralph made the following business gifts during the year.
To Robert (a key client) at Christmas To Angel (Robert's 8-year old daughter) on her birthday To Art (Ralph's secretary) on his birthday ($3 was for gift wrapping) To Paige (Ralph's boss) at Christmas $50 20 30 40
Presuming proper substantiation, Ralph's deduction is: A. B. C. D. E. 83. $53. $73. $78. $98. None of the above.
Which of the following expenses, if any, qualify as deductible? A. B. C. D. E. Contributions to a Coverdell Education Savings Account (CESA). Contributions to a qualified tuition program ( 529 plan). Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX). Contribution to H.R. 10 plan. None of the above.
84.
Which, if any, of the following expenses is subject to the 2%-of-AGI floor? A. B. C. D. E. Qualified tuition expenses under 222. Contribution to traditional IRA. Cost of a CPA exam review course--taxpayer just began employment with an accounting firm. Office in the home deduction for a statutory employee. None of the above.
85.
Which, if any, of the following expenses is subject to the 2%-of-AGI floor? A. B. C. D. E. Gambling losses (to the extent of gambling gains). Moving expenses (not reimbursed by employer). Teaching supplies (up to $250) purchased by a fifth grade teacher. Union dues of an employed machinist. None of the above.
86.
Which, if any, of the following expenses are not subject to the 2%-of-AGI floor? A. Safety shoes purchased by a self-employed plumber. B. Unreimbursed employee expenses. C. Reimbursed employee expenses. Taxpayer-employee does not render an adequate accounting to the employer. D. Tax return preparation fee paid by a non-employed retiree. E. None of the above.
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87.
In contrasting the reporting procedures of employees and self-employed persons regarding job-related transactions, which of the following items involve self-employed? A. B. C. D. E. Form 2106. Schedule C of Form 1040. Form W-2. Schedule A of Form 1040. None of the above.
88.
One of the tax advantages of being self-employed (rather than being an employee) is: A. B. C. D. E. The self-employment tax is lower than the Social Security tax. The cutback adjustment does not apply. Job-related expenses are deductions for AGI. The actual cost method for deducting the business use of an automobile can be selected. A deduction for an office in the home is available.
89.
Match the statements that relate to each other. (Note: Choice L may be used more than once.) 1. Deductible moving expense 2. Deductible job-hunting expenses 3. Safety goggles purchased by an employed carpenter 4. Deduction by an employee of unreimbursed office-in-the-home expenses 5. Characteristic of a taxpayer who is self-employed 6. Automatic mileage method 7. Nondeductible moving expense 8. Mixed (both business and pleasure) foreign travel 9. Actual cost method of determining auto expense 10. Characteristic of a taxpayer who has the status of an employee 11. Tax home has not changed 12. Education expense that is not deductible to maintain or improve existing skills Taxpayer is provided with tools and a place to work Payment for services rendered based on tasks performed Can include actual cost of gasoline Excludes use of MACRS depreciation 10 5 9 6
Lodging while in route 1 Meals while in route 7 Transportation must be allocated if 8 taxpayer spends two weeks on business and one week sightseeing Paralegal obtains a law degree 12 Out-of-town job assignment is 11 temporary Must involve the same trade or 2 business Must be for the convenience of the 4 employer Correct match not provided 3
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90.
Emma holds two jobs and attends graduate school on weekends. The education improves her skills, but does not qualify her for a new trade of business. Before going to the second job, she returns home for dinner. Relevant mileage is as follows?
Home to first job First job to second job Home to second job Home to university 9 miles 16 miles 14 miles 10 miles
How much of the mileage qualifies for deduction purposes? 36 miles. The mileage from the first job to the second job, 16 miles, qualifies. Also, round trip mileage to the university (20 miles) can be claimed if the education Emma is obtaining is deductible. 91. Dan is employed as an auditor by a CPA firm. On most days, he commutes by auto from his home to the office (28 miles round trip). During one month, however, he has an extensive audit assignment closer to home. For this engagement, Dan drives directly from home to the client's premises and back (26 miles round trip). How much, if any, of this mileage can Dan claim as a deduction? 26 miles for each day of the audit assignment. 92. During 2010, Tracy used her car as follows: 12,000 miles (business), 2,500 miles (commuting), and 4,000 miles (personal). In addition, she spent $440 for tolls (business) and $310 for parking (business). If Tracy uses the automatic mileage method, what is the amount of her deduction? $6,750. (12,000 miles $0.50) + $440 + $310 = $6,750. 93. Gus uses his automobile for both business and personal use and claims the automatic mileage rate for all purposes. During 2010, his mileage was as follows:
Personal Business Qualifying moving expense Medical Charitable Qualifying education (MBA program) Miles Driven 4,000 6,000 3,000 1,000 1,000 200
How much can Gus claim for mileage? $3,900 [(6,200 miles $0.50, business and education) + (3,000 miles $0.165, moving) + (1,000 miles $0.165, medical) + (1,000 miles $0.14, charitable)].
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94.
Rachel lives and works in Chicago. She is the regional sales manager for a national fast-food chain. Due to unusual developments, she is compelled to work six straight weeks in the St. Louis area. Instead of spending the weekend there, she flies home every Friday night and returns early Monday morning. The cost of coming home for the weekend approximates $500. Had she stayed in St. Louis, deductible meals and lodging would have been $600. How much, if any, may Rachel deduct as to each weekend? $500 for each weekend, the lesser of the $500 cost of returning home or the $600 cost of staying in St. Louis.
95.
Roberto, a self-employed patent attorney, flew from his home in Nashville to Denver, had lunch alone at the airport, conducted business in the afternoon, and returned to Nashville in the evening. His expenses were as follows:
Airfare Airport parking (Nashville) Lunch Taxis (Denver) $450 12 20 16
What is Roberto's deductible expense for the trip? $478 ($450 + $12 + $16). As Roberto was not away from home, his lunch is not deductible. 96. Nicole went to London on business. While there, she spent 60% of the time on business and 40% on vacation. How much of the air fare of $5,000 can she deduct based on the following assumptions:
a. b. a. b. Nicole was gone five days (i.e., three business and two personal). Nicole was gone five weeks (i.e., three business and two personal). $5,000. $3,000. (60% $5,000).
Transportation costs for mixed use (i.e., both business and personal) need not be allocated as long as domestic trips are involved. Such allocation is necessary, however, for foreign trips unless one of two exceptions applies. One exception deals with trips lasting seven days or less and covers part a. (but not part b.) above. The second exception, less than 25% of the time was for personal use, does not apply to part b., so an allocation must be made. 97. Brandi moved from New York City to California to accept a better job. She incurred the following unreimbursed moving expenses:
Transportation Lodging Meals in route Penalty for breaking apartment lease Forfeiture of athletic club membership Moving company cost $4,000 500 600 2,000 400 6,000
What is Brandi's moving expense deduction? $10,500 ($4,000 + $500 + $6,000). Meals ($600), lease penalty ($2,000), and membership forfeiture ($400) are not qualifying moving expenses.
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98.
After graduating from college, Dylan obtained employment in Boston. In moving from his parents' home in Wichita to Boston, Dylan incurred the following expenses:
Transportation Meals Lodging Cost of moving household goods a. b. a. b. $ 700 380 420 1,500
How much may Dylan deduct as moving expense? Would any deduction be allowed if Dylan claimed the standard deduction for the year of the move? Explain. $2,620 ($700 + $420 + $1,500). No deduction is allowed for meals. Yes. Moving expenses are deductions for AGI and can be claimed regardless of whether a taxpayer takes the standard deduction or chooses to itemize.
99.
Evan is employed as an assistant manager in the furniture division of a national chain of department stores. He is a recent college graduate with a degree in marketing. During 2010, he enrolls in the evening MBA program of a local university and incurs the following expenses: tuition, $4,300; books and computer supplies, $900; transportation expense to and from the university, $350; and meals while on campus, $300. Evan is single and his annual AGI is less than $65,000. As to these expenses, what are Evan's:
a. b. a. b. Deductions for AGI? Deductions from AGI? $4,000. Although the tuition was $4,300, 222 imposes a limitation of $4,000 for tax year 2010. $1,550. $300 (excess tuition not allowed under 222) + $900 (books and computer supplies) + $350 (transportation) = $1,550. No deduction is allowed for meals, since Evan is not in travel status. Further adjustment will be required due to the 2%-of-AGI limitation on certain itemized deductions.
100.
Amanda takes three key clients to a nightclub and incurs the following costs: $220 limousine rental, $360 cover charge, $720 drinks and dinner, and $150 tips. Several days after the function, Amanda mails each client a pen costing $40. The cost includes $4 for engraving of the client's name. Assuming adequate substantiation and a business justification, what is Amanda's deduction? $922. $220 + [($360 + $720 + $150) 50%] = $835. Also allowed are the gifts of $87 (3 $29). The cost of engraving ($4) can be added to the maximum amount of gift allowed ($25).
101.
For the current football season, Rail Corporation pays $28,000 for a skybox (containing 12 seats) at Memorial Arena for eight home games. Regular nonskybox seats at each game range from $80 to $120 a seat. In October, a Rail employee and ten clients use the skybox to attend a game. The event is preceded by a bona fide business discussion, and Rail spent $810 for food and drinks during the game. What is Rail's deduction? $1,125. (12 seats $120) + $810 = $2,250 50% (cutback adjustment) = $1,125. Even though only ten clients attended, all available sets are considered. The highest cost of a regular seat ($120) is used in the computation.
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102.
Brian makes gifts as follows:
Recipient Mr. Brown (a client) Mrs. Brown (Mr. Brown's wife) Ms. Smith (Brian's receptionist) Mr. Jones (Brian's boss) Cost of Gift $27* 15 30 40
* Includes $2 for engraving Presuming adequate substantiation and no reimbursement, how much may Brian deduct? $52 ($27 + $25). The deduction for Mr. Brown's gift can include nominal costs for gift-wrapping and engraving. No deduction is allowed for the gift to Mrs. Brown unless she is in a separate business. Otherwise, she falls under the $25 limit applicable to Mr. Brown. The deduction for Ms. Smith's gift is limited to $25. No deduction is allowed for Brian's gift to his boss. 103. Rocky has a full-time job as an electrical engineer for the city utility. In his spare time, Rocky repairs TV sets in the basement of his personal residence. Most of his business comes from friends and referrals from former customers, although occasionally he runs an ad in the local suburbia newspaper. Typically, the sets are dropped off at Rocky's house and later picked up by the owner when notified that the repairs have been made. The floor space of Rocky's residence is 2,500 square feet, and he estimates that 20% of this is devoted exclusively to the repair business. Gross income from the business is $12,000, while expenses (other than home office) are $5,000. Expenses relating to the residence are as follows:
Real property taxes Interest on home mortgage Operating expenses of residence Depreciation (based on 20% business use) $4,500 8,000 3,000 500
What is Rocky's net income from the repair business?
Business income Less: Expenses Net business income before home office expenses Less: Real property taxes ($4,500 20%) Mortgage interest ($8,000 20%) Operating expenses ($3,000 20%) Depreciation Net income from business $12,000 (5,000) $ 7,000 (900) (1,600) (600) (500) $ 3,400
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104.
In the current year, Bo accepted employment with a Kansas City law firm after graduating from law school. Her expenses for the year are listed below:
Cost of bar review course Qualified moving expenses Job hunting expenses Subscriptions to legal journals Membership dues in bar associations State bar dues $1,500 2,100 1,800 450 620 300
Since Bo worked just part of the year, her salary was only $32,100. In terms of deductions from AGI, how much does Bo have? $770. AGI is $30,000 [$32,100 (salary) $2,100 (moving expenses)]. Thus, the 2%-of-AGI floor is $600 ($30,000 2%). Qualifying itemized deductions are $1,370 ($450 + $620 + $300). Thus, $1,370 $600 = $770 is the allowable itemized deduction. No deduction is allowed for the bar review course and the job hunting expenses. In this case, it is apparent that Bo should claim the standard deduction and not itemize. 105. For the current year, Horton was employed as a deputy sheriff of a county. He had AGI of $50,000 and the following unreimbursed employee expenses:
Attendance at a law enforcement conference ($900 for travel and $200 for meals) Uniforms (includes $300 for laundry and dry cleaning) Professional dues and journals Contribution to sheriff's reelection campaign (highly recommended by Horton's boss) $1,100 1,000 400 400
How much of these expenses are allowed as deductions from AGI? $1,400. $1,000 + $1,000 + $400 = $2,400 (2% $50,000) = $1,400. A cutback adjustment of $100 ($200 50%) is required for the meals obtained during the conference. No deduction is available for the campaign contribution. 106. If a business retains someone to provide services, that person may either be an employee or be self-employed (i.e., independent contractor).
a. b. a. b. What are the tax advantages to the business of having the service provider classified as self-employed? What are the advantages and disadvantages to the service provider of self-employed status? Self-employed persons do not have to be included in various fringe benefits programs (e.g., group-term life insurance, accident and health plans) and retirement plans. Since they are not covered by FICA and FUTA, these payroll costs are avoided. The advantages are that expenses qualify as deductions for AGI. Consequently, deductibility is not affected by the choice of the standard deduction, and no reduction is required for the 2%-of-AGI floor. In terms of disadvantages, being self-employed can lead to other state and local taxes (e.g., license fees, franchise taxes, occupation taxes, gross receipts levy). The most significant, however, is the self-employment tax that materializes.
107.
In terms of income tax treatment, what is the difference between common law and statutory employees? Although subject to Social Security tax, statutory employees are not subject to Income tax withholding. Statutory employees may claim all of their unreimbursed expenses as deductions for AGI. For common law employees, such expenses are deductions from AGI.
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108.
Myra's classification of those who work for her as independent contractors is being questioned by the IRS. It is the position of the IRS that these workers are really employees. What type of factors can Myra utilize to justify her classification? Myra needs to show that she has a reasonable basis for not treating her workers as employees. In this regard, can she prove reliance on any of the following? Judicial precedent, published ruling, or technical advice. A past IRS audit that resulted in no employment tax assessment. A longstanding practice of independent contractor status in the same industry.
Has Myra consistently treated these workers as independent contractors? Has she reported their earnings by filing Form 1099-MISC? 109. Christopher just purchased an automobile for $40,000 which he plans to claim 100% as being for business use. In order to take advantage of MACRS and 179, he plans to use the actual cost method for determining his deduction in the first year. In subsequent years, he will switch to the automatic mileage method. Comment on Christopher's proposed approach. First, limitations are imposed on how much depreciation can be claimed over each year of the five-year write-off period. In most cases, such limitations significantly reduce the depreciation normally allowed. Second, the use of MACRS and/or 179 precludes later converting to the automatic mileage method. Lastly, how many automobiles does Christopher own? If just one, 100% business use could be almost impossible to justify since it negates any personal use. 110. Once set for a year, when might the IRS change the rate for the automatic mileage method? Changes in the past have been justified by significant increases in fuel prices. Such a change places a premium on keeping track of mileage on a monthly basis. 111. Travel status requires that the taxpayer be away from home overnight.
a. b. a. b. What does "away from home overnight" mean? What tax advantages result from being in travel status? "Home" for this purpose is the place of taxpayer's principal employment. "Overnight" need not be a 24-hour period, but it must be a time duration substantially longer than an ordinary day's work such as to require rest or sleep. If "travel status" exists, many otherwise nondeductible expenses (e.g., meals, lodging, transportation) become deductible.
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112.
A taxpayer has multiple jobs at different locations. What factors are considered in determining the site of his tax home? For each job, consider the time spent, the level of activity involved, and the income earned. Most often, the income earned, particularly if disproportionate, is the controlling factor. Thus, the tax home may not be where his family resides.
113.
How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel? The major difference is that transportation charges are fully deductible if the trip is primarily for business and within the North American area. If the foreign trip is primarily business, transportation expenses must be allocated between business and personal unless (1) the taxpayer was away from home for seven days or less or (2) if less than 25% of the time was spent on personal pursuits.
114.
Concerning the deduction for moving expenses, what circumstances, if any, will excuse a taxpayer from meeting the time test of 39 or 78 weeks? The time test will be disregarded if the taxpayer dies, becomes disabled, or is discharged (other than for willful misconduct) or transferred by the new employer. Under certain conditions, expatriates who retire while overseas are exempt from the time test.
115.
A taxpayer just changed jobs and incurred unreimbursed moving expenses.
a. b. a. b. What are his (or her) options if an income tax return has to be filed before the time test is met? What happens if the moving expense deduction has been claimed and the time test is not later satisfied? The taxpayer may claim the deduction right away or wait until the time test is met and file an amended return for the year of the move. If the moving expense is claimed and the time test is not later met, a taxpayer has two options. First, he can increase the income for the following year by the amount of the deduction claimed. Second, he can file an amended return for the year of the move in which the deduction is not claimed.
116.
In terms of IRS attitude, what do the following expenses have in common?
a. b. c. a. b. c. Cost of a CPA exam review course. Cost of a review course for the bar exam. Cost of a law degree by a taxpayer who does not intend to practice law. It is the position of the IRS that the costs associated with becoming a CPA are incurred in order to acquire a basic skill and thus are not deductible as education expenses. The same reasoning as noted in part a. above applies to review course taken to pass the bar exam. Regardless of a taxpayer's career goals, the IRS considers a law degree to be the acquisition of a basic skill.
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117.
Regarding 222 (qualified higher education deduction for tuition and related expenses), comment on the following:
a. b. a. b. Advantages of the provision. Disadvantages and limitations of the provision. Advantages are that the education need not be work related and that the amounts are deductions for AGI. Disadvantages and limitations are: (1) monetary limitation imposed; (2) complete disallowance if AGI exceeds a specified amount; (3) not allowed to a taxpayer who can be claimed as a dependent of another; and (4) not allowed to a married person filing a separate return.
118.
Monica has education expenses that qualify for both the lifetime learning credit and 222 (qualified higher education deduction for tuition). As neither provision covers all of her costs, she plans to use both to increase her tax savings. Is Monica's approach permissible? No. Section 222 cannot be used if either the lifetime learning credit or American Opportunity credit is used. Monica needs to make a choice based on which provision provides the greater benefit.
119.
Meg teaches the fifth grade at a local school. During 2010, she spends $1,200 for school supplies for use in her classroom. On her income tax return for 2010, some of this expense is not reported and the balance is deducted in two different places. Explain what has probably happened. Meg probably has been reimbursed for some of these expenses. If she renders an adequate accounting to her employer, the reimbursement is not reported in her income nor is the expense involved deducted. As to the remaining expenses, she has claimed $250 as a deduction for AGI and the balance as a miscellaneous itemized deduction.
120.
What originally led to the cutback adjustment? In 1997 tax legislation, Congress made certain changes to the adjustment. What were these changes and why were they made? The cutback adjustment was a compromise to the complete disallowance of the three-martini lunch. In short, instead of eliminating deductibility, it was curtailed. When it was realized that the cutback adjustment was also hurting certain types of taxpayers who were not likely to be having three-martini lunches (specifically persons who are regulated by the Department of Transportation), 1997 tax legislation changed the rules. For these taxpayers, the cutback adjustment is lessened to 20% on a phase-in basis.
121.
Some transactions can qualify as either business entertainment or as a business gift. In such cases, the business entertainment classification usually predominates. However, in one situation a choice between the two is allowed. Explain. If the event involves tickets to a concert, play, or sporting event and the taxpayer does not accompany the client, the tickets can be treated as business entertainment or business gifts.
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122.
There is reason to believe that many taxpayers who are eligible to claim an office in the home deduction are not doing so.
a. b. a. b. Why might this be the case? Can this problem be resolved? Many taxpayers are afraid that claiming the deduction will trigger an audit by the IRS. Also, claiming the deduction is not a simple matter. Supporting records must be maintained and a rather complex form completed. The process could be simplified. As in the case of the automatic (or standard) mileage method for claiming auto use, a similar allowance could be formulated for office in the home. Such an allowance would require a minimal amount of substantiation and less complicated reporting.
123.
In connection with the office in the home deduction, comment on the following:
a. b. a. Mixed use (i.e., business and personal) of the portion of the home allocated to business. The difference between direct and indirect expenses for deduction purposes. In most cases, mixed use of the portion allocated to business is not allowed. Consequently, the office must be exclusively used for business. An exception is made, however, when the home is used as a daycare center. Here, mixed use is allowed. Direct expenses (e.g., painting the office) are deductible in full because they only benefit the office area. Indirect expenses (e.g., homeowners casualty insurance) must be allocated since they relate to both the business and personal portions of the home.
b.
124.
In terms of the deductibility of military uniforms, comment on the difference between a member of the National Guard who is:
a. b. a. b. Activated (i.e., called to active duty). Not activated. With the exception of uniforms not suitable for street wear (e.g., ceremonial dress, combat use), no deduction is allowed. The costs of all uniforms qualify for deduction as they are not suited for everyday wear.
125.
Faith just graduated from college and she needs advice on the tax treatment of the costs she incurs in connection with her first job (a loan officer at a bank). Specifically, she wants to know about the following items:
a. b. c. a. b. c. Job search costs. Business wardrobe cost. Moving expenses. Not deductible since it involves Faith's first job. Not deductible since the clothes are suitable for street wear. As long as the time and distance requirements are met, the moving expenses are deductible.
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126.
Regarding tax favored retirement plans for employees and self-employed persons, comment on the following:
a. b. c. d. e. a. The exclusion versus deduction approaches as to contributions by participants. Tax-free accumulation of earnings. The deferral of income tax consequences. Employee versus self-employed status. The Roth IRA approach. Contributions by employees to retirement plans that are qualified provide a tax benefit either in the form of an exclusion from gross income or as a deduction for AGI. The traditional IRA takes the deduction approach. This is also the case of contributions by a self-employed person to a Keogh (H.R. 10) plan. A characteristic of all tax-favored retirement plans is that income accumulates free of tax. This allows for a greater accumulation to take place up to the point of distribution. Except in the Roth IRA, the main objective of retirement plans is to defer taxation until distributions are made. Keogh (H.R. 10) plans are, in effect, the self-employed version of employee retirement plans. Unlike other types of retirement plans, the Roth IRA provides no "up-front" tax benefit (i.e., exclusion or deduction) when contributions are made. Instead, the tax benefit occurs at retirement. Here, all distributions are free of any income tax.
b. c. d. e.
127.
Tom owns and operates a lawn maintenance company. He does not concern himself with employment taxes because he considers all the persons who work for him to be independent contractors. He bases this assumption of the fact that several of his friends who operate similar businesses follow the same approach. Comment on Tom's situation. Tom is living dangerously. Although the similar treatment by others is helpful, under current criteria (see Footnote 64 in Chapter 9 of the text), other considerations come into play. For example, does Tom have any reasonable basis for not treating his workers as employees (i.e., judicial precedent, published ruling, technical advice, prior acceptance by the IRS on audit)? Probably most significant is whether Tom files a Form 1099-MISC for each worker. If not, his status looks bleak as he has acted inconsistently with the position he is taking.
128.
Felicia, a recent college graduate, is employed as an accountant by an oil company. She would like to continue her education and obtain a law degree. Discuss Felicia's tax status if she attends a local law school on a:
a. b. a. Part-time basis. Full-time basis. Regarding the usual education expense justification of maintaining and improving on existing skills, Felicia will not succeed. The IRS has successfully maintained that obtaining a law degree leads to a new trade or business. Reliance on 222, however, is appropriate since the education need not be job related. Unfortunately, 222 only covers tuition, is limited to $4,000, and may be reduced (or eliminated) by an AGI limitation. If Felicia quits her job and returns to college on a full-time basis, she no longer is in a trade or business. A temporary break in employment status (e.g., leave of absence), however, will cure this problem if properly structured. However, Felicia will still encounter the new trade or business provision.
b.
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129.
Discuss the 2%-of-AGI floor and the 50% cutback limitation in connection with various employee expenses under the following arrangements:
a. b. c. d. a. b. c. d. The employee is not reimbursed by the employer. The employee is fully reimbursed under a nonaccountable plan. The employee is partially reimbursed under an accountable plan. The employee is fully reimbursed under an accountable plan. Any cutback adjustment and the 2%-of-AGI floor are imposed on the employee. The employee has the burden of being able to substantiate the expenses involved. Furthermore, no deduction is available if the employee does not itemize deductions from AGI. The reimbursement must be reported as income. Deductions are handled as in part a. above. Unless the reimbursement identifies the expenses covered, it must be allocated between the items that are and are not subject to the cutback adjustment. A washout results. In effect the expenses are treated as deductions for AGI and fully offset the reimbursement. As far as the employee is concerned, the expenses are not subject to the cutback adjustment or the 2%-of-AGI floor.
130.
Ramon and Ingrid work in the field of public relations and incur sizable entertainment expenses. Ramon is employed by a consumer products company, while Ingrid is a self-employed consultant. Regarding the tax treatment of the entertainment expenses, when would:
a. b. a. b. Ramon be better off than Ingrid? Ingrid be better off than Ramon? If Ramon renders an adequate accounting to his employer and is fully reimbursed. In such a case, the employee reports no income or deduction as to these expenses. The cutback adjustment is suffered by the employer. If Ramon does not render an adequate accounting to his employer, he will have to recognize any reimbursement as income and substantiate any deduction. Even worse, he will be subject to the cutback adjustment and the deduction will be a miscellaneous itemized deduction upon which the 2%-of-AGI limit is imposed. Although Ingrid also will be subject to the cutback adjustment, she has a deduction for AGI upon which the 2% rule does not apply.
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