Chapter 5 – Income Tax Deductions

Question 1

The difference between trade/business vs production of income?

Answer 1

Trade/business is when you have more hands on involvement in the business. “Production of income” is when you have a rental property and you don’t have lots of hands on involvement in the production of the income.

Question 2

Deductions ____________ for trade/business expenses and “production of income”.

Answer 2

are allowed

Question 3

What are the three requirements for a business expense to be deductible?

Answer 3

1. Ordinary and necessary
2. Reasonable
3. Paid or incurred in the tax year

Question 4

Are business expenses in connection with legislation or political campaigning deductible?

Answer 4

No, unless at a local level

Question 5

Are you able to deduct business expenses for fines or penalties that you paid for violating the law?

Answer 5

No

Question 6

Someone told me that bribes and kickback business expenses are tax deductible. Is this true?

Answer 6

No

Question 7

Compensation must be ________________ to be deductible as a business expense.

Answer 7

reasonable

Question 8

Compensation is a section that is highly reviewed by the IRS. What are 6 factors in determining what is considered a reasonable compensation?

Answer 8

1. What are the economic conditions?
2. What is the nature of the service you rendered?
3. How much time you devoted to the company?
4. How does your salary compare to the other non-shareholders of the company?
5. How does your salary compare to previous years?
6. How does your salary compare to other employers for the same work that you do in your company?

Question 9

Education expenses are deductible as business expenses under what to circumstances?

Answer 9

Education improve skills in your current job or The education is required by your boss.

Question 10

Education expenses are not deductible if the business expense is for a…

Answer 10

career change or a new job.

Question 11

Are you allowed to deduct travel expenses associated with going to Mexico, as a Spanish instructor, to learn about the culture and help with teaching the new language to your students in the US?

Answer 11

No. Only if you were to travel to an educational event (e.g. conference).

Question 12

If you have 1 telephone line in your home 🏡 , are you able to deduct it as business expenses on your taxes?

Answer 12

No. But if you make any long-distance calls those are deductible on your taxes.

Question 13

What if you have a 2 home phones, are you able to deduct the second phone line as a business expenses on your taxes?

Answer 13

Yes.

Question 14

Name 4 travel expenses that are deductible for business purposes.

Answer 14

1. Transportation
2. Meals
3. Lodging
4. Incidentals.

Question 15

Name 3 deductible transportation expenses.

Answer 15

Cab/bus
Train
Business Auto or rental car

Question 16

Is transportation to your normal job considered transportation expenses?

Answer 16

No. But if you travel from your job to another business location, then you can deduct that.

Question 17

Meals and entertainment, if deductible, must be reduced by ___%.

Answer 17

50%

Question 18

Transportation to a business appointment at a restaurant is…

Answer 18

not subject to the 50% rule.

Question 19

If an employer pays for food, for the employees, are those expenses deductible?

Answer 19

Yes. 100% deductible

Question 20

Business expenses have to be reasonable, ordinary/necessary, and paid during the year. But for an entertainment expenses to be deductible, what is the 4th requirement?

Answer 20

Directly related to the business or business related discussions before or after the event.

Question 21

Are country club dues deductible?

Answer 21

No. Not even social clubs.

Question 22

What is the maximum deduction you can take for giving a gift to an employee or client?

Answer 22

$25

Question 23

If you take a client to the Bulls game and pay $100 for the two tickets, but the tickets face value is $10, how much of the ticket cost is tax deductible as a business expense?

Answer 23

$5

50% of the face value

Question 24

The cost of a sky-box for employee entertainment is…

Answer 24

not deductible.

Question 25

If an entertainment expense is to be deductible as a business expense, what are the 4 pieces of information that you must have record of?

Answer 25

amount of expenses
time/place
business purpose
business relationship to the event

Question 26

Receipt for business entertainment and meals if the cost is more than…

Answer 26

$75

Question 27

What are the 5 major itemized deductions?

Answer 27

charity
casualty
medical
interest
taxes

(CCMIT)

Question 28

What are the 3 “miscellaneous itemized deductions” that are not subject to the 2% floor?

Answer 28

1. Income in respect of a decedent
2. Gambling losses
3. Annuity contract basis recovery

(IGA)

Question 29

To deduct expenses for a home office one of the following three must be present:

Answer 29

1. “principle” place of business
2. meeting places for clients
3. separate structure

Question 30

What are the 4 home office expenses?

Answer 30

furniture
equipment
rent/mortgage
utilities

Question 31

Personal expenses are ______________ as miscellaneous business expenses.

Answer 31

not deductible

Question 32

If you have homeowners insurance, can you deduct the premiums paid as miscellaneous business expenses?

Answer 32

No

Question 33

If you have auto insurance, can you deduct the premiums paid as miscellaneous business expenses?

Answer 33

No

Question 34

If you have an attorney draft a will, can you deduct the expenses associated with that as miscellaneous business expenses?

Answer 34

No

Question 35

Fees for music or other personal lessons are…

Answer 35

not tax deductible.

Question 36

Bob operates his business from his home office. During the current tax year, Bob reported the following:

• Income from the home office business $50,000
• Mortgage interest and real estate taxes paid on the home $15,000
• Home office business expenses $30,000
• Qualified home office expenses $20,000

What is his deduction in the current year related to the qualified home office expenses?

Answer 36

(Income from the business) - (home office expenses) - (taxes and mortgage interest) = $5,000

So only a maximum of $5K of the “qualified home office expenses are deductible.