Business Deductions Flashcards
David is an interstate truck driver subject to Department of Transportation hours of service, but he is not an employee. In 2019, he is allowed to deduct what percent of his meals he had while working as an interstate truck driver? A. 75% B. 80% C. 0% D. 50%
80%
Answer (B) is correct.
Transportation workers who are subject to Department of Transportation hours and service rules are allowed to deduct 80% of the cost of meals consumed while away from home (Publication 463).
Which one of the following is a deductible transportation expense?
A. Use of a vehicle by a self-employed taxpayer to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work.
B. Hauling tools and equipment in a vehicle while commuting to and from a regular place of work.
C. Use of vehicles by Armed Forces Reservists to attend weekend meetings in the general area of their homes.
D. Use of a vehicle which displays material that advertises one’s business while commuting to and from work.
Use of a vehicle by a self-employed taxpayer to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work.
Answer (A) is correct.
A self-employed taxpayer is permitted a deduction for transportation expenses paid in connection with services performed for the taxpayer’s trade or business. The use of a vehicle to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work would qualify as a deductible transportation expense. The transportation expense deduction also includes the cost of any travel by a taxpayer having a regular place of business between home and temporary work stations, regardless of the distances (Publication 463). Thus, not only the costs for assignments beyond a general area mentioned in this answer choice, but also costs related to assignments in the same metropolitan area of one’s regular place of business are now deductible.
Cindy is a salesperson employed by a window manufacturing company, and she travels to various locations to sell her products. She drives 12,000 miles a year. She adequately accounts to her employer for her business expenses. Her employer reimburses her $4,200 for the mileage driven at 35 cents per mile. Based on the standard mileage rate of 58 cents per mile, her expense was $6,960. Cindy is entitled to deduct on Schedule A, Itemized Deductions, transportation expenses of
A. $0, because the unreimbursed expenses of an employee are nondeductible.
B. $6,960, since she can claim the standard mileage rate.
C. $4,200, since she was reimbursed for that amount.
D. $2,760, as excess expense over the reimbursed expense.
$0, because the unreimbursed expenses of an employee are nondeductible.
Answer (A) is correct.
The former allowance for employees to deduct unreimbursed expenses on Schedule A ended in 2017.
Phillip is actively engaged in the oil business and owns numerous oil leases in the Southwest. During the current year he made several trips to inspect oil wells on the leases and to consult about future oil wells to be drilled on these sites. As a result of these overnight trips, he paid the following: Plane fares $4,000 Hotels 1,000 Meals 800 Entertaining lessees 500 Of the $6,300 in expenses incurred, he can claim as deductible expenses A. $5,000 B. $5,400 C. $5,800 D. $6,300
$5,400 Answer (B) is correct. A deduction is allowed for travel expenses while away from home in the pursuit of a trade or business. Meals are deductible under the tax code provided they are currently related to the active conduct of a trade or business, the expense is not lavish or extravagant under the circumstances, and the taxpayer (or an employee) is present during the meals. Entertainment expenses are nondeductible. Meal expenses are limited to 50% of their cost. Also, all these expenditures must be substantiated (Publication 463). Assuming that Phillip’s expenses meet the above requirements, his total deduction is as follows: Plane fares $4,000 Hotels 1,000 Meals ($800 × 50%) 400 Total deduction $5,400
Monte operates a landscaping business. He drives a pick-up to various work sites and to get materials. His employees use three other pick-ups plus a truck to deliver materials and to travel to work sites. His mileage on the five vehicles for the year totaled 200,000 miles. The mileage is incurred ratably throughout the year and is supported by mileage logs. The actual expense of operating all five vehicles was $90,000 for fuel, repairs, etc. He also spent $600 on tolls. During the year, Monte paid $4,000 in interest on vehicle loans. All five vehicles are parked at the business site when not in use in the business. They are not available for personal use. Ignoring any possible depreciation deduction and knowing the mileage rate for the year is $.58, how much of Monte’s vehicle-related expense is currently deductible? A. $94,600 B. $120,600 C. $116,000 D. $116,600
$94,600
Answer (A) is correct.
If the taxpayer owns five or more cars that are used for business at the same time (i.e., a fleet), (s)he cannot use the standard mileage rate of $.58 for the business use of any car. Therefore, Monte must use actual automobile expenses for his deduction. The cost of operating cars used for business includes the following: gas and oil, lubrication and washing, repairs, garage and parking, insurance, and tires and supplies. Tolls and interest expense allocable to the cars are deductible. Therefore, Monte may deduct $94,600 for his actual vehicle related expenses (Publication 463).
Betty Brunett, an employee who is single, spent $2,000 in unreimbursed business expenses associated with her $20,000 annual salary. Included in those expenses were $1,000 of travel and $1,000 of dues and subscriptions. Because of $5,000 of interest expense on her home, she will be filing Schedule A of Form 1040. In the current year, how much of her $2,000 expenses will be deductions “for” and “from” AGI?
For
From
A. $0 $0 B. $1,000 $1,000 C. $0 $1,600 D. $1,000 $600
$0
$0
Answer (A) is correct.
Unreimbursed business expenses of an employee are nondeductible. None of the expenses are deductible for adjusted gross income.
Which of the following is NOT true with respect to an employer’s accountable plan for the reimbursement of employee travel, gift, and care expenses?
A. If the plan calls for actual expense reimbursement but excess reimbursement paid to an employee has been returned, the employer must include the excess amount as wages on Form W-2.
B. If the plan calls for actual expense reimbursement, adequate accounting is made, and the excess returned, no amount is reported as taxable income on Form W-2.
C. If the plan calls for a per diem allowance amount in excess of the federal rate but the employee adequately accounts for the expenses incurred only up to the federal rate and does not return excess reimbursements, the employer must include the excess amount over the federal rates as taxable income on Form W-2 and the amount up to the federal rate in box 12, Form W-2.
D. If the plan calls for a per diem allowance up to the federal rate and the employee adequately accounts for the expenses incurred and returns any excess, no amount is included in Form W-2.
If the plan calls for actual expense reimbursement but excess reimbursement paid to an employee has been returned, the employer must include the excess amount as wages on Form W-2.
Answer (A) is correct.
Under the tax code, an expense reimbursement from an employer is included in gross income and reimbursed business expenses of employees for which the employee accounts to the employer (and is not eligible for any reimbursement in excess of the expenses accounted for) are deductible for adjusted gross income. But if the employee accounts to his or her employer for the expenses, the reimbursement does not have to be included in gross income (Publication 463).
Bob, a calendar-year, cash-basis taxpayer, owns an insurance agency. Bob has four people selling insurance for him. The salesmen incur ordinary and necessary meal and entertainment expenses for which Bob reimburses them monthly. During the current year, Bob reimbursed his agents $10,000 for meals and $26,000 for entertainment. How much of the reimbursement can Bob deduct for the meal and entertainment expenses on his current-year federal income tax return? A. $5,000 B. $36,000 C. $10,000 D. $8,000
$5,000
Answer (A) is correct.
Under the tax code, an employer may deduct reimbursements to an employee subject to the restrictions (Publication 463). There is a 50% limitation for meals when the employer does not treat the expenses as compensation; thus, Bob’s deduction for meal expenses is $5,000 ($10,000 × 50%). The entertainment expenses are nondeductible.
Which of the following is a deductible transportation expense for a self-employed individual?
A. Cost of round-trip transportation between an individual’s home and his client’s place of business.
B. Cost of round-trip transportation between an individual’s office and a restaurant for lunch.
C. Cost of round-trip transportation between an individual’s home and a temporary training site in the same city.
D. Cost of round-trip transportation between an individual’s home and office while conducting business on his cell phone.
Cost of round-trip transportation between an individual’s home and a temporary training site in the same city.
Answer (C) is correct.
A self-employed individual is permitted a deduction for transportation expenses paid in connection with services performed for a trade or business. The use of a vehicle to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work would qualify as a deductible transportation expense. The tax code has extended the transportation expense deduction to include the cost of any travel by a taxpayer having a regular place of business between home and temporary work stations, regardless of the distances (Publication 463).
Which of the following is considered a nonbusiness bad debt?
A. None of the answers are correct.
B. Tom, a CPA, made personal loans to several friends who were not his clients. Three of the loans became totally worthless.
C. Mary obtained a court order for her former husband, Bill, to pay child support. Bill did not pay the child support.
D. Kirby guaranteed a loan as a gesture of friendship for Sue. Sue defaulted and Kirby paid off the loan.
Tom, a CPA, made personal loans to several friends who were not his clients. Three of the loans became totally worthless.
Answer (B) is correct.
A loss from a business debt is an ordinary loss, while a loss from a nonbusiness debt is treated as a short-term capital loss. A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the trade or business of the taxpayer. A nonbusiness bad debt must be wholly worthless to be deducted (Publication 550). The personal loans were, by nature, not connected to Tom’s business, especially since they were not even made to clients.
All of the following elements are part of the directly related test for business meals, EXCEPT
A. The meal took place directly before or after a business discussion.
B. You did engage in business with the person during the meal period.
C. You had more than a general expectation of getting income or some other specific business benefit.
D. The main purpose of the meal was the active conduct of business.
The meal took place directly before or after a business discussion.
Answer (A) is correct.
The directly related test for business meals requires the meal expense to be incurred in a clear business setting. A meal which occurs directly before or after a business discussion does not satisfy this test. It would, however, meet the requirements for the “associated with” test for business meals (Publication 463).
Sid and Rudy co-own a lakeside cabin that they rent to vacationers whenever possible. The cabin was not used as a main home by anyone until October 1 of the current year. During the current year, the following occurred:
Rudy used the cabin for a 3-week (21-day) vacation.
Sid’s brother, Chester, rented the cabin for 2 months (61 days) at less than fair rental price.
Prior to October 1, Sid and Rudy spent a total of 26 days at the cabin working substantially full time repairing and maintaining the cabin.
Starting October 1 and continuing for the balance of the year (92 days), Sid and Rudy rented the cabin to Sid’s son, Martin, who used the cabin as his main home and paid a fair rental price.
What is the number of personal-use days that Sid will use in dividing his current-year expenses between rental-use and personal-use days?
A. 200 days.
B. 174 days.
C. 61 days.
D. 82 days.
82 days.
Answer (D) is correct.
A vacation home is deemed to have been used by the taxpayer for personal purposes if, for any part of the day, the home is used by
The taxpayer, any other person who owns an interest in the home, or the relatives of either
Any individual who uses the home under a reciprocal agreement whether or not rent is charged
Any individual who uses the home unless a fair rental is charged
An exception exists when a relative rents the home at a fair rental value for use as a principal residence. Sid’s personal days include the 21 days Rudy spent at the cabin and the 61 days Chester rented the cabin at less than the fair rental (Publication 527).
George opened a 4-year certificate of deposit in January 2018. He earned $400 in interest for 2018 and reported this on his 2018 return. He withdrew all of the funds in October 2019. However, due to the premature withdrawal provisions, he received only $230 of the 2018 interest, plus $195 of interest for 2019. What should he report in 2019?
A. $195 interest income on Schedule B.
B. $25 interest income on Schedule B.
C. $170 interest expense on Schedule A and $195 interest income on Schedule B.
D. $195 interest income on Schedule B and $170 as an adjustment to gross income.
$195 interest income on Schedule B and $170 as an adjustment to gross income.
Answer (D) is correct.
Interest income earned must be reported in full. The $400 of interest was included in gross income in 2018. The $170 ($400 interest earned – $230 interest received) penalty is a deduction for adjusted gross income under Sec. 62(a)(9), and George will deduct it in 2019 (the year the penalty is incurred). The amount of interest earned and received for 2019 must also be reported in 2019 (Publication 550).
Patsy lent money to Scarlett in Year 1. Scarlett signed a loan agreement and made the agreed-upon monthly payments until May of Year 3, when she stopped making payments. Patsy called Scarlett and wrote her a letter requesting payment but received no response. Then Patsy read in the newspaper that Scarlett had filed for bankruptcy with no assets. Patsy can take a deduction for a bad debt
A. Only on her timely filed Year 3 return.
B. On her timely filed Year 3 return or by amending her Year 3 return within 7 years.
C. By amending her Year 3 return within 3 years.
D. By amending her Year 1 return.
On her timely filed Year 3 return or by amending her Year 3 return within 7 years.
Answer (B) is correct.
A nonbusiness bad debt is defined as any debt other than one acquired in connection with the taxpayer’s trade or business. Bad debts must be deducted in the year they become worthless (Publication 550). Furthermore, the statute of limitations to take a deduction for bad debts and worthless securities is 7 years.
Mr. Pine, a self-employed engineer in Boston, traveled to Chicago in order to attend a course on new engineering techniques. He spent 2 weeks attending the course and remained in Chicago for an additional 6 weeks on personal matters. The air flight cost $200, hotel $600, meals $320, and the tuition for the course $500. How much of these expenses may Mr. Pine deduct on his return? A. $500 B. $714 C. $890 D. $690
$690 Answer (D) is correct. A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business. However, transportation is deductible only if the trip is primarily related to the taxpayer’s trade or business. If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since Mr. Pine spent 6 out of his 8 weeks in Chicago on personal matters, the cost of the flight to Chicago is not deductible. Meals and lodging must always be allocated between personal and business. Under Sec. 274(n), business meals are deductible at only 50% of their cost. The expenses for 2 weeks out of 8 weeks are deductible (Publication 463). Educational expenses are deductible if the education maintains or improves skills required in the taxpayer’s business (Publication 17). Hotel ($600 × 2/8) $150 Meals ($320 × 50% × 2/8) 40 Tuition 500 Total deduction $690
Bob is a sole proprietor. During the year, he incurred the following expenses:
Rental payments for January and February of the next year
$3,000
Country club dues (Bob frequently entertains clients at the country club.)
7,500
Meal expenses incurred while meeting with clients
1,500
What is the amount of Bob’s expenses that are deductible for the year?
A. $4,500
B. $750
C. $8,250
D. $7,500
$750
Answer (B) is correct.
A deduction from gross income is allowed for meal expenses, up to 50% of the actual expense. However, entertainment expenses, such as club dues for social gatherings, are not deductible, and advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply (Publication 463). Accordingly, Bob is entitled to a deduction in the current year of $750 ($1,500 meal expenses × 50%).
Ernest, a self-employed watchmaker, traveled to Germany in September of 2019. During his 5-day stay in Germany, he attended a 10-hour watchmaking seminar in the city of Berlin on a Monday and took a 12-hour tour of a watch manufacturing facility in Dresden on a Wednesday. The rest of the time Ernest spent hiking and touring the countryside. Ernest incurred the following costs for this trip:
Round-trip airfare of $500
Lodging of $1,000
Meals of $300
Seminar and tour registration fees of $200
In 2019, what is the amount that Ernest can deduct for travel, meals, and entertainment for this trip?
A. $2,000
B. $200
C. $1,160
D. $0
$1,160
Answer (C) is correct.
Generally, traveling expenses of a taxpayer who travels outside of the United States away from home must be allocated between time spent on the trip for business and time spent for pleasure. When a trip is for no more than 1 week, as Ernest’s was, the full cost of travel to and from the destination is deductible. The travel expenses while at the destination are still allocated between business and pleasure. Ernest will be able to deduct the entire cost of the airfare, 2/5 of the lodging, a portion of the meals, and all of the seminar and registration fees (Publication 463). The total deduction equals $1,160 [$500 + ($1,000 × 2/5) + ($300 × 1/2 × 2/5) + $200].
In January 2019, Mr. D, who is self-employed, purchased a new automobile which he uses 100% for business. During 2019, he drove the car 14,000 miles. Mr. D also owns another automobile, which he uses occasionally for business but primarily for personal purposes. During 2019, he drove the second car 2,000 business miles. The second car is not fully depreciated. The mileage for both cars was incurred ratably throughout the year. What is the amount of Mr. D’s automobile expense deduction using the standard mileage rate? A. $8,120 B. $9,280 C. $8,720 D. $0
$9,280
Answer (B) is correct.
Automobile expenses pertaining to a trade or business are deductible under the tax code as ordinary and necessary business expenses. The taxpayer may either deduct the portion of actual operating cost of the automobile attributed to business use or compute the deduction based on the standard mileage rate. For 2019, the standard mileage rate is $.58/mile for miles of business use. Mr. D’s deduction for 2019 is $9,280 (16,000 × $.58). The standard mileage rate is adjusted annually (to the extent warranted) by the IRS (Publication 463).
With regard to rental property and personal use of vacation homes and other dwelling units, all of the following statements are true EXCEPT
A. If you rented or tried to rent property for 12 or more consecutive months, you do not count as days of personal use the days on which you used the property as your main home (either before or after offering it for rent) when determining if you used your property as a home.
B. If family members use the property for recreational purposes on the same day you spend working substantially full-time repairing and maintaining your property, the day is counted as a day of personal use.
C. If you use a dwelling unit as a home and rent it for fewer than 15 days during the year, you do not have to include any of the rent in your income, and you cannot deduct any of the rental expenses.
D. If you rent out a room in your home that is always available for short-term occupancy by paying customers, you do not use the room yourself, and you only allow paying customers to use the room, then the room is not considered to be a dwelling unit.
If family members use the property for recreational purposes on the same day you spend working substantially full-time repairing and maintaining your property, the day is counted as a day of personal use.
Answer (B) is correct.
The use of a dwelling for repairs and annual maintenance will not constitute personal use by the taxpayer, even if other family members use the property during the same time for recreational purposes. However, the taxpayer must engage in repairs and maintenance on a substantially full-time basis for the day (Publication 527).
During the year, Sally Sales purchased tickets to three theater performances and two sporting events. Each event includes a meal during the event. She purchased two tickets for each event for a total of 10 tickets, each separately stating the cost of the performance/event and the meal. Sally gave these tickets away to legitimate business customers and has records to prove it. Sally did not go with these customers to the event or performance. Sally can claim
A. The tickets as a business gift expense.
B. The tickets as either a business gift expense or as a business meal expense, whichever is to her advantage.
C. The tickets as business meal expense.
D. No deduction at all since she did not attend the event with her customers.
The tickets as a business gift expense.
Answer (A) is correct.
Sally may only claim the tickets as a business gift expense. No business meal deduction is allowed since Sally did not attend and no business was discussed. To treat the tickets as a business gift, Sally must limit the deduction to $25 per individual donee for each year. In addition, certain other requirements, such as adequate records, must also be maintained (Publication 463).
For purposes of the rules that apply to vacation homes and other dwelling units, consider the following information; then compute Kim’s allowable depreciation for the current year. Days rented in the current year 120 Personal-use days 25 Gross rents received in the current year $2,000 Expenses for the current year allocated to rental use: Interest and taxes $1,000 Repairs 500 Depreciation 8,000 A. $500 B. $0 C. $8,000 D. $6,400
$500 Answer (A) is correct. The tax code restricts the deductions with respect to a dwelling unit used by the taxpayer as a residence. A taxpayer is deemed to use a dwelling unit as a residence if (s)he uses it for personal purposes for a number of days that exceeds the greater of 14 days or 10% of the number of days during the year for which the unit is rented at a fair rental. Since Kim rented the house for 120 days, she was allowed to use it for personal purposes for only 14 days without treating it as a residence. Therefore, Kim’s house is treated as her residence. When a dwelling unit is used by the taxpayer as a residence, the tax code disallows a deduction for expenses exceeding gross income derived from rents, reduced by deductions allowable (e.g., taxes and interest), whether or not the unit was used for rental purposes. Under the tax code, the order of deductions is (1) the allocable portion of expenses deductible regardless of rental activity, (2) deductions not affecting basis, and (3) those that do affect basis. Gross rent $2,000 Interest and taxes (1,000) Repairs (500) Depreciation (500) Income $ 0
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? A. $64 B. $240 C. $0 D. $40
$0
Answer (C) is correct.
No deduction will be allowed for the expenses incurred by Mr. H which were reimbursed by his employer. Therefore, no deduction will be allowed relating to the plane fare ($500), the lodging ($400), and $120 of meals. Additionally, the unreimbursed expenses of an employee are now nondeductible (Publication 17).
Kenneth’s employer gives him $500 a month ($6,000 for the year) for his business expenses. Kenneth does not have to provide any proof of his expenses to his employer, and he can keep any funds that he does not spend. His actual expenses for the year were $1,000 for lodging, $600 for meals while away from home, and $2,000 for entertainment. What reporting is required of Kenneth’s employer, and what reporting is required of Kenneth?
A. Employer adds $6,000 to wages reported on Kenneth’s Form W-2; Kenneth reports $3,600 as a miscellaneous itemized deduction on Schedule A.
B. Employer does not include any amount in Kenneth’s Form W-2; Kenneth reports $2,400 as “Other Income” on the front of his return.
C. Employer adds $6,000 to wages reported on Kenneth’s Form W-2; Kenneth takes no deductions on Schedule A.
D. Employer adds $2,400 to wages reported on Kenneth’s Form W-2; Kenneth takes no deductions on Schedule A.
Employer adds $6,000 to wages reported on Kenneth’s Form W-2; Kenneth takes no deductions on Schedule A.
Answer (C) is correct.
Amounts paid under a nonaccountable plan are included in the employee’s gross income, reported on Form W-2. The unreimbursed expenses of an employee are nondeductible (Publication 463).
With regard to business meal expenses, all of the following statements are true EXCEPT
A. A meal expense must meet one of the two tests: the “directly related” test or the “associated with” test.
B. The deductible limit on business meal expenses is 50%.
C. The cost of a Super Bowl ticket where a qualified business meal will be had during the game is deductible.
D. Club dues are not allowed as a deduction.
The cost of a Super Bowl ticket where a qualified business meal will be had during the game is deductible.
Answer (C) is correct.
Only the cost of the business meal is deductible, not the game ticket (Publication 463).
Mr. Lee rents his vacation home. Given the following information, determine the correct treatment of the rental income and expenses on his current-year return:
Days rented in the current year to
unrelated parties at a fair rental price
56
Days used for personal purposes in the
current year
18
Total income and expenses during the current year:
Gross rental income
$5,000
Allocated interest and taxes
(4,000)
Other allocated expenses
(1,500)
Net rental loss
$ (500)
A. A $500 loss should be shown on Schedule E, Form 1040.
B. Mr. Lee should include none of the income or expenses from the vacation home on his current-year income tax return.
C. Rental expenses (other than interest and taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to rental use.
D. The interest and taxes should be shown on Schedule E, Form 1040.
Rental expenses (other than interest and taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to rental use. Answer (C) is correct. The tax code restricts the deductions with respect to a dwelling unit used by the taxpayer as a residence. A taxpayer is deemed to use a dwelling unit as a residence if (s)he uses it for personal purposes for a number of days that exceeds the greater of 14 days or 10% of the number of days during the year for which the unit is rented at a fair rental. Since Mr. Lee rented the home for only 56 days, he was allowed to use it for personal purposes for only 14 days. Thus, Mr. Lee’s deductible loss is limited. When a dwelling unit is used by the taxpayer as a residence, the tax code disallows a deduction for expenses exceeding the gross income derived from rents reduced by deductions allowable (e.g., taxes and interest), whether or not the unit was used for rental purposes. Under the tax code, the order of deductions is (1) the allocable portion of expenses deductible regardless of rental activity, (2) deductions not affecting basis, and (3) those that do affect basis (Publication 527).
Which one of the following criteria is used to determine a taxpayer’s “tax home,” if the taxpayer does not have a regular or main place of business or work?
A. Taxpayer has living expenses at his main home that are duplicated because his business requires him to be away from that home.
B. Taxpayer performs part of his business in the area surrounding his main home and uses that home for lodging while doing business in the area.
C. Taxpayer has not abandoned the area in which both his traditional place of lodging and his main home are located; members of his family live at his main home; or he often uses that home for lodging.
D. All of the answers are correct.
All of the answers are correct.
Answer (D) is correct.
Three factors are used to determine where a taxpayer’s tax home is (1) taxpayer performs part of his business in the area surrounding his main home and uses that home for lodging while doing business in the area; (2) taxpayer has living expenses at his main home that are duplicated because his business requires him to be away from that home; and (3) taxpayer has not abandoned the area in which both his traditional place of lodging and his main home are located; members of his family live at his main home; or he often uses that home for lodging. If you satisfy all three factors, your “tax home” is the home where you regularly live (Publication 463).
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 2014, 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. $2,100
B. $1,500
C. $1,450
D. $600
$1,500
Answer (B) 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).
Bobby, a self-employed taxpayer, spends $2,000 on baseball tickets in 2019 to take a client to a game, where they will discuss business. The tickets are all-inclusive, meaning they include food and beverages. While at the game, Bobby estimates that they receive food and beverages with a value of $500. How much of these expenses can Bobby deduct on his 2019 tax return? A. $500 B. $250 C. $1,250 D. $0
$0
Answer (D) is correct.
In general, 50% of meal expenses are deductible. However, the IRS has indicated in Notice 2018-76 that meal expenses that are not separately billed (i.e., included as part of the cost of entertainment) will be treated as nondeductible entertainment expenses.
Thom is sole proprietor of a small company. He recently 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 meal expense on his Schedule C for the current year? A. $150 B. $112.50 C. $0 D. $75
$75
Answer (D) is correct.
Business meals, 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 the meal is associated with trade or business and directly precedes or follows substantial business discussion.
Bethany and Michael (wife and husband) are itemizing their Schedule A expenses on their 2019 return. Michael, an employee, traveled to Japan for his employer but was not reimbursed. His meal expenses totaled $500. How much can Michael deduct for meals? A. $250 B. $150 C. $500 D. $0
$0
Answer (D) is correct.
The amount deductible for meal expenses is 50% of the actual expense. The limit also applies to the taxpayer’s own meals. The expense must be directly related or associated with the active conduct of a trade or business. The predominant purpose must be the furthering of the trade or business of the taxpayer incurring the expense (Publication 463). However, the unreimbursed expenses of employees are nondeductible. Thus, Michael’s deduction is zero.
In 2019, Cooper started a new business that requires him to use his car extensively for business purposes. Cooper has not claimed any depreciation on his car in the past. Cooper’s records reflect that he incurred the following expenses for 2019: Gasoline and oil $2,480 Repairs on auto 680 Business parking and tolls 120 Depreciation -- business portion 1,760 Insurance 636 Licenses, tags, etc. 80 Total $5,756
Total miles driven (incurred ratably throughout the year) 30,000 Business miles 24,000 What is the maximum deduction that Cooper is allowed for the business use of his car in 2019? A. $17,520 B. $13,920 C. $14,040 D. $5,756
$14,040
Answer (C) is correct.
Cooper can use the standard mileage rate authorized by the IRS, which is $.58 per business mile for 2019. Direct business (other than depreciation) expenses may be added to this, e.g., parking of $120. Use of the standard mileage rate results in $13,920 (24,000 × $.58) plus parking equals $14,040. Since this amount is greater than actual business operating costs of $4,981 [($3,876 × 80%) + $120 parking and tolls + $1,760 depreciation], $14,040 will be deducted (Publication 463).
Which of the following is NOT deductible as an “actual car expense” by a taxpayer who uses that method to figure the deductible cost of operating his or her car for business purposes? A. Gas. B. Parking fines. C. Lease fees. D. Depreciation.
Parking fines.
Answer (B) is correct.
Automobile expenses pertaining to a trade or business are deductible under the tax code as ordinary and necessary business expenses. A deduction is allowed for expenses for gasoline, oil, tires, repairs, insurance, depreciation, licenses, and lease fees (Publication 463). A fine or a penalty paid to a government for the violation of any law is not a deductible business expense.
Janice received $10,000 in educational assistance benefits from her employer during 2019 to reimburse her for the cost of course tuition and fees for her to earn a degree in accounting. The benefits were paid under an accountable plan and were not included in Janice’s W-2. She has a modified adjusted gross income of $80,000, and she files single. A list of Janice’s 2019 expenses follows. What is Janice’s deductible tuition and fee expense?
$2,000 for an underwater basket weaving class not required for her degree
$8,000 for accounting courses required for her degree
$4,000 for on campus room and board
$1,000 for textbooks
$1,000 for lab fees for courses required for her degree
A. $14,000
B. $10,000
C. $16,000
D. $0
$0
Answer (D) is correct.
A limited amount of educational expenses is generally deductible. However, if a taxpayer receives reimbursements from his or her employer, the tax treatment depends on the employer’s reimbursements. If reimbursements equal expenses and the employee makes an accounting of the expenses to the employer, the reimbursements are excluded from the employee’s gross income, and the employee may not deduct the expenses. This is referred to as an accountable plan (Publication 463). Since Janice is accounting for her educational expenses to her employer under an accountable plan, she cannot deduct any educational expenses.
Willy, a self-employed laboratory consultant specializing in white mice, attended a convention in Paris concerning the care and feeding of white mice. The convention was held in Paris since most of the white mice specialists in the world are located in France. Willy’s expenses were $1,600 for airfare, $400 for food, and $400 for lodging. Willy spent 5 days at the convention and 3 days visiting friends. How much can he deduct for the trip? A. $1,450 B. $1,375 C. $2,400 D. $0
$1,375 Answer (B) is correct. The tax code provides that no deduction is allowed for travel expenses for a person to attend a convention held outside North America, unless the meeting is directly related to the active conduct of his or her trade or business, and it is as reasonable for the meeting to be held outside North America as within. Willy’s convention in France will satisfy these tests. However, this trip is still subject to the rules under the tax code, which require all foreign travel for more than 1 week to be allocated between business and personal time when more than 25% of the time is spent on nonbusiness affairs (Publication 463). Therefore, Willy may deduct only 5/8 of the transportation, food, and lodging expenses. Meals are limited to 50% of total cost. His deduction is as follows: Airfare ($1,600 × 5/8) $1,000 Lodging ($400 × 5/8) 250 Meals ($400 × 50% × 5/8) 125 Total travel expense deduction $1,375
All of the following may be deducted by a self-employed taxpayer as a transportation expense EXCEPT
A. Getting from one workplace to another in the course of your business or profession.
B. Commuting expenses if you work during the commuting trip using your telephone to make business calls or have business associates ride with you to and from work and you have a business discussion in the car.
C. Going to a business meeting away from your regular workplace.
D. Visiting clients or customers after going to your office.
Commuting expenses if you work during the commuting trip using your telephone to make business calls or have business associates ride with you to and from work and you have a business discussion in the car.
Answer (B) is correct.
A taxpayer’s costs of commuting between the taxpayer’s residence and the taxpayer’s place of business or employment generally are nondeductible personal expenses. However, the costs of going between one business location and another business location are generally deductible. A taxpayer may deduct daily transportation expenses incurred in going between the taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works. Making business calls or meeting with associates while commuting between a residence and place of business does not permit the transportation expenses to be deducted (Publication 463).
During 2019, Ted, a self-employed taxpayer, drives his car 5,000 miles to visit clients, 10,000 miles to get to his office, and 500 miles to attend business-related seminars. He also spent $300 for airfare to another business (1-day) seminar and $200 for parking at his office. Using $.58 per mile, what is his deductible transportation expense? A. $3,490 B. $300 C. $9,290 D. $3,690
$3,490 Answer (A) is correct. Commuting expenses between a taxpayer’s residence and a business location within the area of the taxpayer’s home are generally not deductible. In addition, the cost of parking at a taxpayer’s place of work is not deductible. However, transportation between home and a temporary work location in the same trade or business may be deducted. Thus, the transportation expenses to visit clients and the business-related seminars are all deductible (Publication 463). Mileage $3,190 (5,500 miles × $.58/mile) Airfare 300 Deductible travel costs $3,490
