Automobile And Truck Expenses Flashcards
Chapter Q1
Miriam uses her car in her decorating business and claims her actual expenses each year on her tax return. Which of the following expenses is not directly deductible, assuming she uses the car 100 percent for business?
(Search Chapter 1)
a. sales tax on the purchase of the car
b. auto insurance
c. parking fees
d. highway tolls
a. sales tax on the purchase of the car
That’s correct! Miriam cannot directly deduct the sales tax on her car in the year that she paid it because this is an expense that relates to the entire useful life of the car. Instead, she must add the sales tax to her basis in the car and recover this cost through claiming depreciation each year.
Chapter 1 Q2
Bill is a self-employed contractor who normally works at an office in the city. Every Monday morning as he drives to the office, he attends a national conference call to network with other contractors across the country. Bill’s tax preparer refuses to consider this as business mileage. What other option does Bill have to recoup his mileage expenses for these trips?
(Search Chapter 1)
a. Bill can claim the expenses on Schedule A as Unreimbursed Employee Expenses.
b. Bill cannot claim these expenses because the call usually does not last for the entire duration of his drive to the office.
c. The tax preparer is wrong; Bill can claim the expenses on Schedule C.
d. Bill cannot claim these expenses under any circumstances.
b. Bill cannot claim these expenses under any circumstances.
That’s correct! Bill attends this conference call while he commutes from home to his main place of employment at the office of his employer. Commuting expenses by definition are not deductible, and thus there is no way for Bill to legally claim these expenses.
Chapter 1 Q3
According to Fred’s logbook, he drove 8,500 miles spread evenly throughout the year during 2022 in his pick-up truck in the course of his business as a tile layer. He also paid $150 in tolls and $40 for parking in relation to his business use of his truck, as well as $30 to repair a flat tire that happened while he was using the truck for work. How much can he claim for his car expenses if he uses the standard mileage method?
(Search Chapter 1)
a. $5,142
b. $4,950
c. $5,332
d. $5,3620
c. $5,332
That’s correct! Fred calculates his standard mileage deduction as follows: (4,250 miles × 58.5 cents per mile = $2,486) + (4,250 miles × 62.5 cents per mile = $2,656) + ($150 parking) + ($40 tolls) = $5,332. The cost of the repair is not added because all repairs are considered to be included within the standard mileage rate of 58.5 or 62.5 cents per mile.
Chapter 1 Q4
Christine is working a second job for a few months as she saves for a vacation with her family. On an average day, she drives five miles from her home to her regular job, where she is employed as a customer service representative, and at the end of the regular day, she drives another eight miles to her second job at a restaurant, where she works as a waitress. After the restaurant closes, she drives ten miles back to her home. How many of these miles are deductible for Christine over the course of a five-day week?
(Search Chapter 1)
a. 25
b. 40
c. 90
d. 115
b. 40
That’s correct! Christine’s trip of five miles from home to her main job is not deductible because it is a commuting expense, but her trip of eight miles from her regular job to her second job is deductible. Her journey home of ten miles is not deductible because it is regarded as a commute. This means every week she compiles a total of (5 x 8 =) 40 miles that she can claim as car expenses.
Chapter 2 Q1
What is the upper limit on a taxpayer’s combined Section 179 deduction, additional first year depreciation allowance, and regular MACRS depreciation deduction for a passenger car purchased in 2022 and placed in service in 2022?
(Search Chapter 2)
a. $19,200
b. $18,000
c. $11,200
d. There is no upper limit.
a. $19,200
That’s correct! For cars placed in service in 2022, a taxpayer’s combined Section 179 deduction, additional first year depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction of $19,200.
Chapter 2 Q2
What business use requirement is attached to eligibility for claiming the Section 179 deduction?
(Search Chapter 2)
a. The taxpayer must not use his or her vehicle more than 50 percent for business.
b. The taxpayer must use his or her vehicle 100 percent for business.
c. The taxpayer must use his or her vehicle more than 50 percent for business.
d. There is no eligibility requirement related to percentage of business use.
c. The taxpayer must use his or her vehicle more than 50 percent for business.
That’s correct! The taxpayer cannot qualify for the Section 179 deduction unless his or her business use of the vehicle is more than 50 percent.
Chapter 2 Q3
What claims or allowances may be available to a taxpayer who placed her car in service for business in 2022 and wishes to recover her expenditure for the cost of the car, plus sales tax and improvements?
(Search Chapter 2)
a. depreciation deductions
b. additional first year depreciation allowance
c. Section 179 deduction
d. all of the above
d. all of the above
That’s correct! Provided that she meets the respective qualifying conditions, the taxpayer may be able to claim any combination of the additional first year depreciation allowance, the Section 179 deduction, and the depreciation deduction. Although the combined total amount that can be claimed is limited, this combination of deductions may allow her to reclaim a substantial part of her initial outlay for the vehicle.
Chapter 2 Q4
Which of the following items does not decrease a taxpayer’s basis in his or her vehicle?
(Search Chapter 2)
a. Section 179 deduction
b. replacing the engine
c. alternative motor vehicle credit
d. additional first year depreciation allowance
b. replacing the engine
That’s correct! Replacing the engine on the vehicle requires an investment by the taxpayer and thus it increases his or her basis in the vehicle. All of the other items in the list have the effect of decreasing basis.
Chapter 3 Q1
Melissa started using her car for business last year and calculated her business use percentage at 45 percent. Which of the following statements regarding her claim for actual expenses for use of the car is not true?
a. She must use the straight-line depreciation method.
b. She must use the straight-line depreciation method initially but can switch to MACRS if her business use increases above 50 percent in a later year.
c. She cannot claim the Section 179 deduction.
d. She cannot claim the additional first year depreciation allowance.
b. She must use the straight-line depreciation method initially but can switch to MACRS if her business use increases above 50 percent in a later year.
That’s correct! Melissa’s use of her car in the first year of service was below 45 percent, and as a result she must use the straight-line method to calculate depreciation for the entire recovery period of the car. She cannot use MACRS at any time, even if she later uses her car more than 50 percent for business.
Chapter 3 Q2
Tim bought a car for $10,000 and placed it in service on November 1, 2022. He used the car 40 percent for business. What method should he use to claim depreciation on the vehicle on his 2022 tax return?
(Search Chapter 3)
a. straight-line
b. MACRS 200 DB
c. MACRS 150 DB
d. He cannot claim depreciation.
a. straight-line
That’s correct! Tim must use the straight-line depreciation method because he uses the car less than 50 percent for business.
Chapter 3 Q3
Which method of calculating depreciation provides the highest deduction in the first year of operation of a car used for business?
(Search Chapter 3)
a. straight-line method
b. 150 percent declining balance
c. 200 percent declining balance
d. They all provide the same amount of deduction in the first year.
c. 200 percent declining balance
That’s correct! For the first year of business use of a car, the 200 percent declining balance method produces the highest depreciation amount among the three different methods listed, while the straight-line method produces the lowest amount of the three.
Chapter 3 Q4
Which of the following factors related to the depreciation deduction for a vehicle used for business could be responsible for the taxpayer having unrecovered basis at the end of the vehicle’s expected recovery period?
(Search Chapter 3)
a. improvements made to the vehicle during its useful life
b. the high purchase price of the vehicle
c. annual depreciation limits imposed by tax code
d. all of the above
** d. all of the above**
That’s correct! All of the items listed can contribute to a taxpayer being unable to recover the entire basis of a vehicle during the normally expected five-year recovery period. If the basis is high to begin with and then is later increased by adding improvements to the vehicle, it becomes quite challenging to overcome the annual depreciation deduction limits, thus leading to unrecovered basis in the vehicle.
Chapter 4 Q1
Kelly used her car for business from the time she placed it in service on July 1, 2019. She traded in her car on September 15, 2022. How much of the normal depreciation can she claim for this 2022 part-year use?
(Search Chapter 4)
a. zero
b. 12.5 percent
c. 50 percent
d. 100 percent
c. 50 percent
That’s correct! When taxpayers dispose of their car during the year, they can claim a partial deduction for depreciation in the year of the disposition. If the car was originally placed in service during the period of January 1 through September 30, the taxpayer can deduct one-half of the depreciation amount figured for the full year. Kelly put her car in service on July 1, which means she can claim 50 percent of the normal depreciation amount for 2022.
Chapter 4 Q2
In 2020, Dan bought a car to use exclusively in his business. He paid $23,000 for the car. He used the standard mileage deduction rate from 2020 through 2022. He drove as follows: 15,000 miles in 2020; 17,000 miles in 2021; and 13,900 miles in 2022. What would his depreciation on the car be for 2020 through 2022?
(Search Chapter 4)
a. $12,084
b. $0
c. $3,614
d. $11,934
a. $12,084
That’s correct! He would use the $0.27 per mile for 2020, $0.26 for 2021 and $0.26 for 2022. This totals $12,084 ($4,050 + $4,420 + $3,614).
Chapter 4 Q3
Dianne traded in the car she used in her floral business for a used van, paying $4,000 in cash as part of the deal. Her adjusted basis in her old car was $6,500. What is her basis in the van that she now drives?
(Search Chapter 4)
a. $2,500
b. $10,500
c. $6,500
d. $4,000
b. $10,500
That’s correct! When a taxpayer trades in an old car for a new one, the transaction is considered a like-kind exchange. Generally speaking, no gain or loss is recognized. In a trade-in situation, the taxpayer’s basis in the new property is generally his or her adjusted basis in the old property plus any additional amount he or she pays. Dianne’s basis in the van is thus ($6,500 + $4,000) = $10,500.
Chapter 4 Q4
Carolyn bought a car in 2020 exclusively for business use. She paid $25,000 for the car. She drove 16,000 miles per year in 2020, 2021, and 2022. What is her adjusted basis at the end of 2022?
(Search Chapter 4)
a. $13,640
b. $38,640
c. $11,360
d. $0
c. $11,360
That’s correct! Her mileage yields depreciation of $4,320, $4,160, and $4,160 for each of the years 2020–2022, respectively. The total is $12,640. This depreciation is subtracted from the purchase price of $25,000, which equals $12,360.
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Chapter 5 Q1
Martha drives her own car for business purposes as well as for personal use. She is trying to set up a system for keeping records of her business trips but is worried about how much storage space she will need. How long does she need to keep her records for each year’s business use of her car?
(Search Chapter 5)
a. for as long as she owns the car
b. for as long as it takes for each year’s tax return to be processed by the IRS
c. for as long as she owns the car and three years after filing the tax return in which the final deductions were claimed
d. for seven years after filing the tax return in which the deductions were claimed
c. for as long as she owns the car and three years after filing the tax return in which the final deductions were claimed
That’s correct! The IRS may select a tax return for audit at any point up to three years after the return is filed or the tax is due, whichever is the later. If her return were to be audited, Martha may need to provide evidence to support her car expense deduction, including the purchase price and basis for depreciation. Thus, she should keep her records for as long as she owns the car plus at least three years after filing the tax return containing her final deductions for the vehicle.
Chapter 5 Q2
Roger is a sales representative who has a regular set of customers that he calls on by driving his car on a standard route throughout the course of each week. What type of records could he keep to provide adequate substantiation of the standard mileage deduction if his tax return were to be audited?
(Search Chapter 5)
a. a physical logbook with daily entries
b. a Smartphone app where he records his daily activities and downloads the results to his computer at the end of the week
c. a detailed record of his activities during the first week of each month
d. all of the above
d. all of the above
That’s correct! All of the methods in the list are acceptable forms of recordkeeping to prove Roger’s business mileage. Individuals are free to choose the method that suits them best, provided they satisfy the minimum conditions, including keeping the records for at least three years.
Chapter 5 Q3
Bob has a $25,000 car he uses to visit his clients at their offices, meet with vendors, and make deliveries of his products. These are the only business uses of his car. He keeps adequate records for the first week of each month. These records indicate that 80 percent of the use is for business and the remaining 20 percent is for personal. Invoices and bills show that the business use continues at the same rate for each week of the month. His weekly records are representative of the car. If the car has depreciated in value by $8,000 during 2022, how much of this depreciation can he attribute to his business mileage?
(Search Chapter 5)
a. $8,000
b. $0
c. $29,000
d. $6,400
d. $6,400
That’s correct! The car was used 80 percent for business. Out of the total depreciation of, $8,000, $6,400 can be attributed to business use. ($8,000 × 80% = $6,400)
Chapter 6 Q1
Which of the following statements is not true with regard to an accountable expense plan?
(Search Chapter 6)
a. The taxpayer’s expenses must have a business connection.
b. The taxpayer must return any excess reimbursement or allowance within two business days.
c. The taxpayer must adequately account to the employer for his or her expenses within a reasonable period of time.
d. The taxpayer should keep good records to substantiate expenses.
b. The taxpayer must return any excess reimbursement or allowance within two business days.
That’s correct! There is no arbitrary deadline for these repayments, and thus this statement is false. Instead, excess reimbursements made under an accountable expense plan must be returned to the employer within a reasonable period of time.
Chapter 6 Q2
In 2022, Kathy’s salary in her part-time job in the Air Force Reserve was $10,000. In June, she used her own car to travel to meet potential recruits and reported a total of 1,000 miles traveled for business purposes. The Air Force reimbursed her mileage under its accountable plan at the rate of 66 cents per mile. What figure should Kathy expect to see in Box 1 of her W-2 for 2022 when she receives it from her employer?
(Search Chapter 6)
a. $10,000
b. $10,075
c. $10,585
d. $10,660
b. $10,075
That’s correct! There will be an extra amount in Box 1 of Kathy’s W-2 to reflect the excess mileage that her employer reimbursed her for above the federal rate of 58.5 cents per mile. The excess amount is (.66 – .585) × 1,000 = $75. The total amount in Box 1 will be $10,000 + $75 = $10,075.
