Deduction, Losses & Passive Activities

Question 1

Samantha, who is single and has MAGI of $59,400, was recently employed by an accounting firm. During the year, she spends $3,450 for a CPA exam review course and begins working on a law degree in night school. Her law school expenses were $4,860 for tuition and $405 for books (which are not a requirement for enrollment in the course).

Assuming no reimbursement, how much of these expenses can Samantha deduct?

Answer 1

$0

The CPA review course is not an educational requirement.

Question 2

In 2021, Robert takes four key clients and their spouses out to dinner at a local restaurant. Business discussions occurred over dinner. Expenses were $560 (drinks and dinner) and $112 (tips to servers).

If Robert is self-employed, how much can he deduct for this event?

Answer 2

Promotional meals & entertainment are 100% deductible. Therefore, Robert can deduct $672 for this event.

$560 + 112 = $672

Question 3

Jayda, who is self-employed, maintains an office in her home that comprises 26% (290 square feet) of total floor space. Gross income for her business is $53,150, and her residence expenses are as follows:

$3,324 Real property taxes
5,540 Interest on mortgage
2,770 Operating expenses
4,595 Depreciation (based on 26% business use)

What is Jayda’s office in the home deduction based on the regular method?

Answer 3

($3,324 x 26%) + (5,540 x 26%) + (2,770 x 26%) + (4,595 x 26%)
=$7,620 home office deduction

Question 4

Jayda, who is self-employed, maintains an office in her home that comprises 26% (290 square feet) of total floor space. Gross income for her business is $53,150, and her residence expenses are as follows:

$3,324 Real property taxes
5,540 Interest on mortgage
2,770 Operating expenses
4,595 Depreciation (based on 26% business use)

What is Jayda’s office in the home deduction based on the simplified method?

Answer 4

The standard home office deduction is $5 per square foot (max. 300 sqft.). Therefore:
$5 x 290 sqft. = $1,450 simplified home office deduction

Question 5

In June 2021, Enrique and Denisse Espinosa traveled to Denver to attend a three-day conference sponsored by the American Society of Implant Dentistry. Denisse, a self-employed practicing oral surgeon, participated in scheduled technical sessions dealing with the latest developments in surgical procedures. On two days, Enrique attended group meetings where various aspects of family tax planning were discussed. On the other day, he went sightseeing. Enrique does not work for his wife, but he prepares their tax returns and handles the family investments. Expenses incurred in connection with the conference are summarized below.

$2,600 Airfare (two tickets)
765 Lodging (single and double occupancy are the same rate-$255 each day)
840 Meals at local restaurants ($280 x 3 days)*
820 Conference registration fee (includes $120 for Family Tax Planning sessions)
325 Car rental
*Split equally between Enrique and Denisse Espinosa

How much, if any, of these expenses can the Espinosas deduct?
Enrique’s activities __ constitute a trade or business. Therefore, he can deduct $__ of his expenses.

Answer 5

Enrique’s activities do not constitute a trade or business. Therefore, he can deduct none of his expenses.

Question 6

In June 2021, Enrique and Denisse Espinosa traveled to Denver to attend a three-day conference sponsored by the American Society of Implant Dentistry. Denisse, a self-employed practicing oral surgeon, participated in scheduled technical sessions dealing with the latest developments in surgical procedures. On two days, Enrique attended group meetings where various aspects of family tax planning were discussed. On the other day, he went sightseeing. Enrique does not work for his wife, but he prepares their tax returns and handles the family investments. Expenses incurred in connection with the conference are summarized below.

$2,600 Airfare (two tickets)
765 Lodging (single and double occupancy are the same rate-$255 each day)
840 Meals at local restaurants ($280 x 3 days)*
820 Conference registration fee (includes $120 for Family Tax Planning sessions)
325 Car rental
*Split equally between Enrique and Denisse Espinosa

Denisse's deductible expenses are:
Airfare (one ticket)
Lodging
Meals
Registration fee
Car rental
Total

Answer 6

Denisse’s deductible expenses are:

Airfare (one ticket) $1,300
Lodging $765
Meals $420 (=840/2)
Registration fee $700 (=820-120 family tax planning for Enrique)
Car rental $325
Total: $3,510

Question 7

Barbara incurred the following expenses during 2021: $2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $530 for multiple vitamins and antioxidant vitamins, $2,750 for a smoking cessation program, $500 for nonprescription nicotine gum, $2,100 for insulin, and $11,245 for funeral expenses for her mother who passed away in June. Barbara’s AGI for 2021 is $43,900.

Is the following expense included in computing the medical expense deduction?

$2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition

Answer 7

Not included

Question 8

Barbara incurred the following expenses during 2021: $2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $530 for multiple vitamins and antioxidant vitamins, $2,750 for a smoking cessation program, $500 for nonprescription nicotine gum, $2,100 for insulin, and $11,245 for funeral expenses for her mother who passed away in June. Barbara’s AGI for 2021 is $43,900.

Is the following expense included in computing the medical expense deduction?

$530 for multiple vitamins and antioxidant vitamins

Answer 8

Not included

Question 9

Barbara incurred the following expenses during 2021: $2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $530 for multiple vitamins and antioxidant vitamins, $2,750 for a smoking cessation program, $500 for nonprescription nicotine gum, $2,100 for insulin, and $11,245 for funeral expenses for her mother who passed away in June. Barbara’s AGI for 2021 is $43,900.

Is the following expense included in computing the medical expense deduction?

$2,750 for a smoking cessation program

Answer 9

Included

Question 10

Barbara incurred the following expenses during 2021: $2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $530 for multiple vitamins and antioxidant vitamins, $2,750 for a smoking cessation program, $500 for nonprescription nicotine gum, $2,100 for insulin, and $11,245 for funeral expenses for her mother who passed away in June. Barbara’s AGI for 2021 is $43,900.

Is the following expense included in computing the medical expense deduction?

$500 for nonprescription nicotine gum

Answer 10

Not included

Question 11

Barbara incurred the following expenses during 2021: $2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $530 for multiple vitamins and antioxidant vitamins, $2,750 for a smoking cessation program, $500 for nonprescription nicotine gum, $2,100 for insulin, and $11,245 for funeral expenses for her mother who passed away in June. Barbara’s AGI for 2021 is $43,900.

Is the following expense included in computing the medical expense deduction?

$2,100 for insulin

Answer 11

Included

Question 12

Barbara incurred the following expenses during 2021: $2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $530 for multiple vitamins and antioxidant vitamins, $2,750 for a smoking cessation program, $500 for nonprescription nicotine gum, $2,100 for insulin, and $11,245 for funeral expenses for her mother who passed away in June. Barbara’s AGI for 2021 is $43,900.

Is the following expense included in computing the medical expense deduction?

$11,245 for funeral expenses

Answer 12

Not included

Question 13

Barbara incurred the following expenses during 2021: $2,355 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $530 for multiple vitamins and antioxidant vitamins, $2,750 for a smoking cessation program, $500 for nonprescription nicotine gum, $2,100 for insulin, and $11,245 for funeral expenses for her mother who passed away in June. Barbara’s AGI for 2021 is $43,900.

What is Barbara’s medical expense deduction for 2021?

Answer 13

$2,750 smoking cessation program + 2,100 insulin = $4,850
AGI floor = $43,900 AGI x 7.5% = $3,293
Medical deduction = $4,850 - 3,293 = $1,557

Question 14

Pierre, a cash basis, unmarried taxpayer, had $3,020 of state income tax withheld during 2021. Also in 2021, Pierre paid $755 that was due when he filed his 2020 state income tax return and made estimated payments of $2,114 towards his 2021 state income tax liability. When Pierre files his 2021 Federal income tax return in April 2022, he elects to itemize deductions, which amount to $13,950, including the state income tax payments and withholdings, all of which reduce his taxable income.

What is Pierre’s 2021 state income tax deduction?

Answer 14

$3,020 withheld income tax + 755 tax payment + 2,114 estimated tax payments = $5,889 state income tax deduction

Question 15

Pierre, a cash basis, unmarried taxpayer, had $3,020 of state income tax withheld during 2021. Also in 2021, Pierre paid $755 that was due when he filed his 2020 state income tax return and made estimated payments of $2,114 towards his 2021 state income tax liability. When Pierre files his 2021 Federal income tax return in April 2022, he elects to itemize deductions, which amount to $13,950, including the state income tax payments and withholdings, all of which reduce his taxable income.

As a result of overpaying his 2021 state income tax, Pierre receives a refund of $1,208 early in 2022. The standard deduction for single taxpayers for 2021 was $12,550. How much of the $1,208 will Pierre include in his 2022 gross income?

Answer 15

$1,208

Question 16

Donna donates stock in Chipper Corporation to the American Red Cross on September 10, 2021. She purchased the stock for $24,500 on December 28, 2020, and it had a fair market value of $35,000 when she made the donation.

What is Donna’s charitable contribution deduction? The stock is treated as __ property and Donna’s charitable contribution deduction is $__ for tax purposes.

Answer 16

Normally, when FMV > Book value, a capital gain is recognized but because this is a charitable donation it is treated as ordinary income for tax purposes. However the deduction is limited to the property basis (book value) of $24,500.

Question 17

Donna donates stock in Chipper Corporation to the American Red Cross on September 10, 2021. She purchased the stock for $24,500 on December 28, 2020, and it had a fair market value of $35,000 when she made the donation.

Assume instead that the stock had a fair market value of $21,000 (rather than $35,000) when it was donated to the American Red Cross. What is Donna’s charitable contribution deduction?

Answer 17

As a result of FMV < Book Value, the charitable contribution deduction will be the FMV of $21,000.

Question 18

For calendar year 2021, Stuart and Pamela Gibson file a joint return reflecting AGI of $348,600. Their itemized deductions are as follows: Note: All expenses are before any applicable limitations, unless otherwise noted.

$46,000 Casualty loss in a Federally declared disaster area (not covered by insurance; before the 10%-of-AGI limitation but after the $100 floor)
18,400 Home mortgage interest (loan qualified as acquisition indebtedness)
920 Credit card interest
13,800 Property taxes on home
25,300 Charitable contributions
16,100 State income tax
1,380 Tax return preparation fees

Calculate the amount of itemized deductions the Gibsons may claim for the year.

Answer 18

Casualty loss deduction = $46,000 - (348,600 AGI x 10%) = $39,000 + 18,400 home mortgage interest + 25,300 charitable contributions + 10,000 maximum property tax deduction = $64,840 itemized deduction amount

*The maximum property tax deduction is $10,000. Since the Gibson’s property taxes exceeded this amount, they are limited to this threshold.

Question 19

Rose dies with passive activity property having an adjusted basis of $70,000, suspended losses of $22,400, and a fair market value at the date of her death of $98,000. Of the $22,400 suspended loss existing at the time of Rose’s death, how much is deductible on her final return or by the beneficiary?

The basis for the property is __ to $__; therefore, __ of the $22,400 suspended loss is deductible on Rose’s final return or by the beneficiary.

Answer 19

The basis for the property is stepped up to $98,000; therefore, none of the $22,400 suspended loss is deductible on Rose’s final return or by the beneficiary.

Question 20

Troy’s financial records for the year reflect the following:
$1,960 Interest income from bank savings account
3,920 Taxable annuity receipts
294 City ad valorem property tax on investments
6,860 Investment interest expense

Calculate Troy’s net investment income and his current investment interest deduction. How is a deduction for any potential excess investment interest treated?

Troy’s net investment income is $__ and his investment interest deduction is $__. Any potential excess investment interest expense not deducted this year is __.

Answer 20

$1,960 interest income on bank savings + 3,920 taxable annuity receipts - 294 city d valorem property tax on investments = $5,586

Troy’s net investment income is $5,586 and his investment interest deduction is $5,586. Any potential excess investment interest expense not deducted this year is carried forward.

Question 21

Cristiano performs services for Ryan. Which of the following factors, if any, indicates that Cristiano is an independent contractor rather than an employee?

a. Cristiano follows a specific set of instructions from Ryan to complete tasks.
b. Ryan sets the work schedule.
c. Crisitano is paid based on tasks performed.
d. Ryan provides the tools used.

Answer 21

C

Question 22

Which of the following would constitute an employer-employee relationship?

a. A physician who hires a nurse to help her with patient screening and preliminary tests in the office.
b. A CPA who prepares a client’s tax return
c. A gardener who takes care of individual lawns for a monthly fee
d. A plumber who comes to your home to fix a leking faucet.

Answer 22

A

Question 23

When using the automatic mileage method, which of the following expenses, if any, also can be claimed?

a. MACRS depreciation
b. Enging tune-up
c. Interest on auto loan
d. Parking

Answer 23

D

Question 24

Ralph made the following business gifts during the year.

$50 to Robert (a key client) at christmaas
20 to Angel (Robert’s 8-year old daughter) on her birthday
30 to Art (Ralph’s secretary) on his birthday ($3 was for gift wrapping)
40 to Paige (Ralph’s boss) at Christmas

Presuming proper substantiation, Ralph’s deduction is:

a. $78
b. $0
c. $53
d. $73

Answer 24

50% of promotional gift to client - $50 x 50% = $25

100% of promotional gift to secretary less gift wrapping - $30 - 3 = $27

Question 25

Fred and Lucy are married, ages 33 and 32, and together have AGI of $120,000 in 2021. They have four dependents and file a joint return. They pay $5,000 for a high deductible health insurance policy and contribute $2,600 to a qualified Health Savings Account. During the year, they paid the following amounts for medical care: $9,200 in doctor and dentist bills and hospital expenses, and $3,000 for prescribed medicine and drugs. In October 2021, they received an insurance reimbursement of $4,400 for the hospitalization. They expect to receive an additional reimbursement of $1,000 in January 2022. Determine the maximum itemized deduction allowable for medical expenses in 2021.

a. $9,200
b. $3,800
c. $800
d. $12,800

Answer 25

B

$9,200 doctor and dentist expenses - 4,400 insurance reimbursement = $4,800 unreimbursement expenses + $5,000 high deductible health insurance policy + 3,000 prescribed medications = $12,800 total medical expenses - ($120,000 AGI x 7.5% AGI floor threshold rate) = $3,800 medical expense deduction

Question 26

Hugh, a self-employed individual, paid the following amounts during the year:

$3,800 Real estate tax on Iowa residence
1,700 State income tx
2,100 Real estate taxes on a vacation home
1,200 Gift tax paid on gift to daughter
1,750 State sales taxes
300 State occupational license fee
475 Property tax on value of his automobile (used 100% for business)

What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI?

a. $9,625
b. $10,000
c. $7,650
d. $8,850

Answer 26

C

$3,800 real estate tax on Iowa residence + 2,100 real estate tax on vacation home + 1,750 state sales tax = $7,650 itemized deductions

Question 27

Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization). She was in Louisiana for three weeks. She normally makes $500 per week as a carpenter’s assistant and plans to deduct $1,500 as a charitable contribution. In addition, she incurred the following costs in connection with the trip: $600 for transportation, $1,200 for lodging, and $400 for meals. What is Emily’s deduction associated with this charitable activity?

a. $600
b $2,200
c. $1,200
d. $1,800

Answer 27

B

$600 transportation + 1,200 lodging + 400 travel meals = $2,200 charitable contribution deduction

Question 28

Paul, a calendar year single taxpayer, has the following information for 2021:

$175,000 AGI
13,500 State income taxes
3,000 State sales tax
18,900 Real estate taxes
6,800 Gambling losses (gambling gains were $12,000)

Paul’s allowable itemized deductions for 2021 are:

a. $39,200
b. $10,000
c. $42,200
d. $16,800

Answer 28

D

$10,000 maximum state income tax deduction threshold + 6,800 gambling losses = $16,800 itemized deductions

Question 29

In 2021, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2021 and $180,000 in 2022. Joanne’s share of the LLC’s losses was $68,000 in 2021 and $36,000 in 2022. How much of these losses can Joanne deduct?

a. $68,000 in 2021; $22,000 in 2022
b. $68,000 in 2021; $0 in 2022
c. $0 in 2021; $0 in 2022
d $68,000 in 2021; $36,000 in 2022

Answer 29

A

$340,000 business loss x 20% shareholder interest = $68,000 2021 shareholder’s loss
$180,000 x 20% = $36,000 2022 loss

$90,000 investment - 68,000 2021 business loss = $22,000

2022 deduction is the less of the $36,000 loss or balance from the investment balance of $22,000. Therefore the answer is $22,000 which fully exhausts the initial investment.

Question 30

Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl’s AGI for the current year after considering the passive investment?

a. $240,000
b. $245,000
c. $195,000
d. $200,000

Answer 30

$200,000 service revenue + 45,000 dividends received + 5,000 passive income - 5,000 maximum loss on passive investments = $245,000 AGI

*Losses on passive activities are limited up to the amount of passive income.