Business Deductions Flashcards
Charlie, who is self-employed, paid $7,500 to rent a 10-seat skybox at X stadium for three baseball games. The cost of regular nonluxury box seats at each game was $20 a seat. What is the amount Charlie can deduct as entertainment expense after any limitations?
A.
$600
B.
$3,750
C.
$7,500
D.
$300
$300
Answer D is correct.
The deductible portion of entertainment expenses paid in connection with a trade or business is limited to 50% of the expense. In addition, the cost of a skybox that is leased for more than one event is disallowed to the extent that it exceeds the cost of nonluxury box seat tickets multiplied by the number of seats in the skybox (Publication 463). The allowable deduction is therefore $300, which is equal to $600 ($20 × 10 seats × 3 games) × 50%.
Elsie, a cash-basis taxpayer, had the following nonbusiness bad debts for the current year:
Loan to sister-in-law to buy gifts, forgiven
$ 250
Loan to neighbor made in 2010,
evidenced by note 1,500 Loan to son to pay college tuition 1,200 Back rent due from tenants for 3 months 600 What is the amount Elsie may claim as nonbusiness bad debts for the current year?
A. $600 B. $1,450 C. $1,500 D. $2,100
C.
$1,500
Answer (C) is correct.
A bad-debt deduction may be taken only for a bona fide debt arising from a valid debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. Loans to family members are usually considered to be gifts unless the taxpayer can prove that a debtor-creditor relationship and a bona fide debt existed. Here, the loan to the sister-in-law was forgiven and there is no evidence supporting a bona fide debt to the sister-in-law or the son. Therefore, the loans to the sister-in-law and son do not qualify as bona fide debts. The back rent due likewise does not qualify because Elsie is a cash-basis taxpayer and does not accrue the rent owed. The loan to the neighbor, however, does constitute a nonbusiness bad debt since it was evidenced by a note. (Publication 550.)
Under which situation below is a deduction allowable for an office in your home?
A. You are an attorney and use a den in your home to write legal briefs. Your family also uses the den for recreation.
B. You use your walk-in closet at home exclusively and regularly to bill customers, clients, or patients; to set up appointments; and to order supplies. You also rent office space downtown where you also conduct those same activities. You use the home office three days a week and the rented office space two days a week.
Graded C. You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities to monitor personal investments.
Correct D. Your home is the only fixed location of your business of selling mechanics’ tools at retail. You regularly use your walk-in closet for storage of inventory and product samples. You also use this area occasionally for personal purposes.
Your home is the only fixed location of your business of selling mechanics’ tools at retail. You regularly use your walk-in closet for storage of inventory and product samples. You also use this area occasionally for personal purposes.
Answer D is correct.
A deduction for depreciation is allowed if the home office is connected with a trade or business, used exclusively to conduct that business, and no other facility or location is used by the taxpayer
Cindy is a salesperson employed by a window manufacturing company, and she travels to various locations to sell her products. She drives 12,000miles a year. She adequately accounts to her employer for her business expenses. Her employer reimburses her $4,140 for the mileage driven at 34.5cents per mile. Based on the standard mileage rate of 57.5 cents per mile, her expense was $6,900. Cindy is entitled to deduct on Schedule A, Itemized Deductions, transportation expenses of
A.
$0 since Cindy was reimbursed by her employer.
B.
$2,760 as excess expense over the reimbursed expense.
C.
$4,140 since she was reimbursed for that amount.
D.
$6,900 since she can claim the standard mileage rate.
B.
$2,760 as excess expense over the reimbursed expense.
Answer (B) is correct.
Actual automobile expenses may be used for the deduction, or the taxpayer may use the standard mileage rate. If the taxpayer is reimbursed for some of the expenses, the taxpayer may only deduct the portion of expenses that are not reimbursed (Publication 463). Using the standard mileage rate, Cindy’s expense was $6,900 (12,000 × $.575). Her reimbursement was $4,140 (12,000 × $.345). Thus, her deductible expense is $2,760 ($6,900 – $4,140).
When Fred loaned $2,000 to his brother in Year 1, his brother signed a note and made monthly payments until he was injured in an accident in March of Year 2. Fred is still owed $500 and his brother, who is no longer able to work, has declared bankruptcy. Fred had also guaranteed his brother’s bank loan as a favor to his brother and was required to pay off the $800 loan balance. Fred, a cash method taxpayer, is also owed $500 rent by a former tenant. How much bad debt deduction can Fred take on his Year 2 return?
A. $500
B. $1,300
C. $1,000
Incorrect D. $1,800
How much bad debt deduction can Fred take on his Year 2 return?
Correct A. $500
Answer A is correct.
If you guarantee a debt that becomes worthless, you cannot take a bad debt deduction for your payments on the debt unless you can show either that your reason for making the guarantee was to protect your investment or that you entered the guarantee transaction with a profit motive. If you make the guarantee as a favor to friends and do not receive any consideration in return, your payments are considered a gift and you cannot take a deduction. The back rent due does not qualify because Fred is a cash method taxpayer and does not accrue the rent owed. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift. There cannot be a bad debt unless there is a true creditor-debtor relationship between you and the person or organization that owes you the money (Publication 550). Thus, the $500 loan qualifies as a bad debt deduction.
of the following might include income in respect of a decedent EXCEPT
A.
The decedent’s final return.
B.
The return of any person to whom the estate properly distributes the right to receive the income.
C.
The beneficiary’s return, if the right to the income is passed directly to the beneficiary and the beneficiary receives it.
D.
The estate’s return, if the estate receives it.
.
The decedent’s final return.
Answer A is correct.
Income in respect of a decedent (IRD) is earned by the taxpayer but not received prior to his or her death or accrued prior to his or her death if on the accrual method, so it is not included on the decedent’s final return.
For 8 months of each year, George lives in Ocala, Florida, training horses for several owners and earning approximately $20,000. He rents an apartment for the 8 months. He stays in motels or rented rooms at various racetracks in other states for the other 4 months of the year during horse racing season and earns approximately $10,000. What part of George’s travel expenses can be deducted?
A.
One-third of his total meals and lodging because he is away from his tax home one-third of the year.
B.
Only his meals and lodging for the 4 months he is away from his tax home, Ocala.
C.
None of his meals or lodging because he has no tax home.
D.
All meals and lodging for the entire year.
Only his meals and lodging for the 4 months he is away from his tax home, Ocala.
Answer B is correct.
An individual’s tax home can be determined by the amount of time spent in an area and the relative amount of income earned there. Since George lives in Ocala 8 months and earns more of his income there, Ocala is considered his tax home. The 4 months that he is not in Ocala, he is on temporary assignment and may deduct meals and lodging expenses associated with his business travel. (Publication 463.)
The following statements about dividends received from a dividend reinvestment plan are true EXCEPT
A.
Reinvested dividends are not taxable if not removed from the plan.
B.
Reinvested dividends are taxable and are added to the basis of the stock or mutual fund.
C.
Reinvested dividends are treated as ordinary dividends.
D.
Reinvested dividends are taxable in the year paid.
Reinvested dividends are not taxable if not removed from the plan.
Answer A is correct.
Amounts received as dividends are ordinary gross income. A dividend reinvestment plan allows a taxpayer to use his or her dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash (Publication 17).
During the current year, Mr. H, an employee of Corporation Z, flew to Seattle to meet with a client and incurred the
following expenses that were directly related to his business:
Plane fare $500 3 days’ lodging 400 Meals 120 Theater tickets with a face value of $40 each for H and his client 240
Mr. H’s employer reimbursed him $500 for plane fare, $400 for lodging, and $120 for meals after Mr. H submitted the necessary accounting of his expenses. The reimbursement was not included on Mr. H’s W-2. What is the amount of the deduction Mr. H may claim on his current-year return, disregarding the 2%-of-adjusted-gross-income limitation?
a: $64
b: $0
c: $240
d: $40
Correct Answer: d
Your Question: deduction relating to the cost of a ticket for an entertainment activity is limited to the face value of the ticket. The total deduction for entertainment expense is limited to 50%. Thus, the allowed deduction is $40 ($80 × 50%). (Publication 17.)
Please note the question states, “Theater tickets with a face value of $40 each for H and his client.” Thus, if Mr. H bought his ticket and the client’s ticket the cost was $80($40 * 2). Entertainment expenses are limited to 50% therefore, the total deduction for entertainment expense is $40($80 / 50%).
Furthermore, the answer explanation states, “Additionally, the deduction relating to the cost of a ticket for an entertainment activity is limited to the face value of the ticket.” The face value of the tickets combined was $80, and the amount Mr. H paid for them was $240.
With respect to an employer’s reimbursement of employee business expenses, which of the following statements is not a requirement of an accountable plan?
A.
The expenses incurred by the employee must have a business purpose.
B.
The reimbursement of meal and entertainment expenditures is limited to 50% of the amount incurred.
C.
The employee must provide an accounting to the employer within a reasonable period of time.
D.
The employee must return any excess reimbursement or allowance to the employer within a reasonable period of time.
B.
The reimbursement of meal and entertainment expenditures is limited to 50% of the amount incurred.
Answer (B) is correct.
The reimbursement of meal and entertainment expenditures is not limited except by their total amount. The employer can reimburse 100% of allowable meal and entertainment expenses; however, the employer can deduct only 50% of the allowable meal and entertainment expenses on his or her tax return. Further, since the plan is an accountable one, the employer will not recognize the reimbursements as taxable wages, and the employee will not recognize the deductions on his or her return (Publication463).
In determining which place of business constitutes an individual’s tax home, all of the following factors are taken into account except
A.
Total time spent at each place of business.
B.
The degree of business activity at each place of business.
C.
The relative income earned at each place of business.
D.
The amount of expenses incurred at each place of business.
D.
The amount of expenses incurred at each place of business.
Answer (D) is correct.
The IRS maintains that the tax home for an individual is the location of the principal place of business for the purpose of travel expenses. When the taxpayer has two places of business, the IRS determines the principal place of business using a test based on three factors: (1) the total time spent at each place of business, (2) the degree of business activity at each place of business, and (3) the relative income earned at each place of business (Publication 463
usan is a waitress and earned $15,000 in wages, not including any tips she received in 2017. She received tips of $17 in January, which she did not report to her employer. Because she became ill in February and did not return to work until late March, she also forgot to report the $58 for tips that she received in February. She did report the $7,000 she received as tips for the rest of the year. How much income must she report as wages, tips, and other compensation on her tax return?
A.
$15,183
B.
$22,075
C.
$15,260
D.
$22,185
$22,075
Answer B is correct.
Gross income, as defined in Sec. 61(a) of the IRC and Publication 17, is all sources of income unless excluded in the tax code. Wages and tips are not excluded in the tax code. Thus, wages, tips, and other compensation for 2017 should be $22,075 ($15,000 + $17 + $58 + $7,000).
David and Carmen were divorced in 2014. Under the final divorce decree, David was ordered to pay Carmen $800 a month for the support of their two children, who remained in the custody of Carmen. Over the next 2 years, David was very inconsistent in making child support payments to Carmen. In 2016, he missed three payments. In 2017, he made up one of the 2016 payments and missed five more payments. Assuming Carmen is a cash-basis taxpayer, what amount of nonbusiness bad debt may she claim in 2016 and 2017?
A. None in either year.
B. $2,400 in 2016 and $4,000 in 2017.
C. $2,400 in 2016 and $3,200 in 2017.
Incorrect D. $1,600 in 2016 and $4,000 in 2017.
. None in either year.
Answer A is correct.
A nonbusiness bad debt is any debt other than a debt that is created or acquired in the course of a trade or business of the taxpayer. Nonbusiness debt cannot be a bad debt for tax purposes unless it becomes completely worthless. Unpaid child support and alimony cannot be deducted as bad debt. The taxpayer has no basis in the obligation (Publication 550).
Thom is sole proprietor of a small company. Herecently negotiated a substantial sale. Following the signing of the contract, Thom took the clients to dinner at a cost of $150. What is Thom’s deductible entertainment expense on his Schedule C for the current year?
A. $112.50 B. $0 C. $150 D. $75
D.
$75
Answer (D) is correct.
Business meals and entertainment expenses, if properly substantiated and related or associated with a business purpose, are deductible subject to a 50% limitation (Publication 463). This expense meets the associated test. The associated test states that expenses qualify if entertainment is associated with trade or business and directly precedes or follows substantial business discussion.
Lisa travels to various locations during her work week. Using the following data, determine the number of miles she may claim as transportation expenses for this period: •Monday – 40 miles, round trip, from home to her full-time job
•Tuesday – 20 miles from home to her full-time job, then 10 miles from her full-time job to her part-time job, then 30 miles to her home
•Wednesday – 60 miles, round trip, from her home to her part-time job; she did not work at her full-time job
A. 160 miles.
B. 40 miles.
C. 10 miles.
10 miles.
Answer C is correct.
A taxpayer’s cost of commuting between the taxpayer’s residence and the taxpayer’s place of business or employment are generally nondeductible personal expenses. However, the costs of going between one business location and another business location are generally deductible (Publication 463). The only miles that may be deducted as a transportation expense are the miles between Lisa’s two places of business, which is 10 miles.
