Other Deductions Flashcards

Question

``` Jane is traveling to New York from Florida for a 2-day business event. Her total flight cost is $350, and she is shipping display material for the event at a cost of $100. While in New York, Jane had dry cleaning expenses totaling $25, for which she left a $10 tip. Which of these expenses are deductible? I. Flight cost. II. Shipping cost for display material. III. Dry cleaning expense. IV. Tip left for dry cleaning. ``` A. I, II, III, and IV. B. I and II only. C. I, II, and III only. D. I only.

Answer 1

I, II, III, and IV. For travel within the U.S., expenses other than transportation (e.g., airfare) are 100% deductible if the primary purpose is business. In addition, sending baggage and sample or display material between the regular and temporary work locations, dry cleaning and laundry, and any tips paid are deductible. Note that all of these expenses must be made for business purposes when traveling away from home.

Answer 2

No, because the primary purpose of the trip is personal. For travel within the U.S., expenses other than transportation (e.g., airfare) are allocated based on personal or business purpose. Transportation expenses are 100% deductible if the primary purpose is business or 0% deductible if the primary purpose is personal. Because more days were spent for personal purposes than business purposes, the primary purpose of the trip is personal and Chris cannot deduct the cost of the flight.

Answer 3

All of the answers are correct. Generally, traveling expenses (including meals and lodging) 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 the trip is for not more than 1 week or when the time spent for personal reasons on the trip is less than 25% of the total time away from home, no allocation is required.

Answer 4

When a taxpayer’s family lives at the temporary or minor post of duty, the taxpayer may not claim travel expenses. A taxpayer may deduct traveling expenses between the principal place of business and the place of business at a temporary or minor post of duty. When the taxpayer’s family lives at the temporary or minor post of duty, the taxpayer may still claim travel expenses.

Answer 5

If you establish that a meeting held on a cruise ship is directly related to your trade or business, you may be able to deduct expenses of up to $2,000 per trip. A limited deduction is available for expenses incurred for conventions on U.S. cruise ships. This deduction is limited to $2,000 with respect to all cruises beginning in any calendar year. Thus, $2,000 total can be deducted for cruise conventions.

Answer 6

Travel expenses incurred attending a convention related to the taxpayer’s business. Deductible travel expenses include those incurred when attending a convention related to the taxpayer’s business.

Answer 7

If a taxpayer can show that his or her attendance benefits his or her trade or business, (s)he can deduct his or her and his or her family’s travel expenses providing the expenses are reasonable. Travel expenses are not allowed for a spouse, dependent, or other individual who accompanies the taxpayer on a business trip unless such person is an employee of the person who is paying or reimbursing the expenses, the travel of such person serves a bona fide business purpose, and the expenses of such person are otherwise deductible.

Answer 8

$5,400 ``` A deduction is allowed for travel expenses while away from home in the pursuit of a trade or business [Sec. 162(a)]. Meals are deductible under Sec. 162 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. A deduction is allowed for the meals. Under Sec. 274(n), meal expenses are limited to 50% of their cost. Also, these expenditures must be substantiated under Sec. 274(d). Assuming that Bobo’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 ```

Answer 9

If the business purpose of a meal is not recorded, other evidence may be used to substantiate the business purpose. Section 274(d) requires the taxpayer to substantiate by adequate records or by sufficient corroborating evidence any deduction for travel and meals.

Answer 10

$4,550 Dr. Unsa’s deduction is limited because, although he traveled outside the United States primarily for business purposes, more than 25% of his time was spent on nonbusiness activities. Therefore, he may deduct $2,800 (70%) of the air travel costs, $1,400 (70%) of his lodging costs, and $350 of his meal expenses. The meal deduction is subject to the 50% limitation, which must be applied before the deductible amount can be figured. Thus, $1,000 meal expenses subject to the 50% limit equals $500. 70% of the $500 is deductible ($350).

Answer 11

The fact that the taxpayer has been appointed or elected as a delegate to a convention does not, in itself, entitle him or her to a deduction. A taxpayer’s appointment as a delegate to a convention does not, in itself, entitle the taxpayer to a deduction. A deduction is allowed for ordinary and necessary traveling expenses incurred by a taxpayer while away from home in the conduct of a trade or business.

Answer 12

$2,275 Dr. Water’s deduction is limited because, although he traveled outside the United States primarily for business purposes, more than 25% of his time was spent on nonbusiness activities. Therefore, he may deduct $1,400 (70%) of the air travel costs, $700 (70%) of his lodging costs, and $175 of his meal expenses. The meal deduction is subject to the 50% limitation, which must be applied before the deductible amount can be figured. Thus, $500 meal expenses subject to the 50% limit equals $250. Seventy percent of the $250 is deductible ($175).

Answer 13

$420 A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business [Sec. 162(a)]. However, transportation is deductible only if the trip is primarily related to the taxpayer’s trade or business (Reg. 1.162-2). If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since the taxpayer spent more days on business than personal time, the cost of the travel expenses related to business are deductible.

Answer 14

$0 The expenses of a meal include amounts spent on food and tips relating to the meal. The amount allowable as a deduction to the employer for meal expenses is limited to 50% of the expenses. Transportation expenses to and from a business meal are 100% deductible. However, as an employee, Lisa has no way to claim work-related expense deductions. The 2% of AGI miscellaneous itemized deductions was discontinued in 2017.

Answer 15

The cruise ship company provides a statement that it has adequate facilities to accommodate the needs of the convention, seminar, or meetings. The cruise ship company does not need to provide a statement that it has adequate facilities to accommodate the convention, seminar, or meetings. The following five requirements must be met for the $2,000 cruise ship deduction: 1. The convention, seminar, or meeting is directly related to your trade or business. 2. The cruise ship is a vessel registered in the United States. 3. All of the cruise ship’s ports of call are in the United States or in possessions of the United States. 4. You attach to your return a written statement signed by you that includes information about a. The total days of the trip, b. The number of hours each day that you devoted to scheduled business activities, and c. A program of the scheduled business activities of the meeting. 5. You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes a. A schedule of the business activities of each day of the meeting and b. The number of hours you attended the scheduled business activities (Publication 463, page 9).

Answer 16

$800 A taxpayer may deduct ordinary and necessary expenses incurred when traveling away from home on business. A business deduction is not allowed for personal expenses. Bart must divide the total travel expenses between the business related expenses and personal expenses. He may only deduct as a business expense the business related travel expenses. Therefore, Bart may deduct $800 ($950 – $100 – $50) of the travel expenses excluding meals as a business expense.

Answer 17

$0 According to Rev. Rul. 75-432, if the period of work is or becomes indefinite, travel expenses are not deductible because the individuals are treated as though they changed the location of their tax homes to their work location.

Answer 18

$1,260 ``` Under Reg. 1.162-2(b), on a trip made primarily for business, the entire amount for transportation may be deducted, but the food and lodging must be allocated between business and personal time. However, under Sec. 274(c) and Reg. 1.274-4, travel outside the United States must be allocated between business and personal (including the transportation) if the travel is in excess of 1 week when more than 25% of the time is for nonbusiness activity. The airfare on the trip to Buffalo is entirely deductible, while food and lodging are deductible for only 2 days. On the trip to Toronto, the airfare must be apportioned (2/3 business) as well as the food and lodging. Under Sec. 274(n), meals are deductible at only 50% of their cost. Assuming Willy’s meals met the requirements for business meals, his business deduction is Buffalo: Airfare $300 Meals ($20 × 50% × 2 days) $20 Lodging ($20 × 2 days) $40 Toronto: Airfare ($600 × 2/3) $400 Meals ($100 × 50% × 2 weeks) $100 Lodging ($200 × 2 weeks) $400 Total travel expense deduction $1,260 ```

Answer 19

$1,375 ``` Section 274(h) 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. Alvin’s convention in France will satisfy these tests. However, this trip is still subject to the rules under Sec. 274(c), 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. Therefore, Alvin 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 ```

Answer 20

$1,800 A premium paid for insurance against losses from fire, accident, storm, theft, or other casualty is deductible if it is an ordinary and necessary expense of a business. When an insurance premium is paid in advance for more than 1 year, only a pro rata portion of the premium is deductible for each year, regardless of the taxpayer’s method of accounting. A portion of the premium paid in Year 1 is deductible in Year 2. The deductible amount is $1,800 ($3,600 premium ÷ 2 years).

Answer 21

$6,000 Section 162(a) allows a deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. Insurance to recover overhead expenses is deductible. Property insurance is also deductible for any property owned by the business. Section 264(a) provides, however, that no deduction is allowed for premiums on a life insurance policy covering the life of an employee if the taxpayer is directly or indirectly a beneficiary. These are generally known as “key man” insurance policies. Since the Gotham Goliaths club is the beneficiary, the $10,000 premium is not deductible. Therefore, the total deduction for insurance premiums is $6,000 ($5,000 for overhead insurance and $1,000 for property insurance).

Answer 22

Workers’ compensation on behalf of partners in a business partnership. Workers’ compensation insurance premiums paid on behalf of employees are deductible as a business expense. However, for this purpose, partners are not considered employees of the partnership (they are considered self-employed owners), and the insurance premiums on their behalf are deductible as guaranteed payments, not as an insurance expense.

Answer 23

Loss of earnings due to sickness or disability of John. A premium on a personal disability insurance policy is not deductible when it applies to insurance for the self-employed owner.

Answer 24

$0 A premium paid for insurance against losses from fire, accident, storm, theft, or other casualty is deductible if it is an ordinary and necessary expense of a business. However, the premiums here are not deductible until paid in Year 2 because Beth is a cash-basis taxpayer. Furthermore, the premiums will have to be apportioned over the 2-year period of the policy but cannot be deducted before they are paid.

Answer 25

$3,500 Self-employed individuals may deduct 100% of the health insurance costs incurred during 2020 for themselves, their spouses, and their dependents. However, Drew can make the deduction only for the 7 months of premiums wherein he was not covered under his wife’s plan. Amounts eligible for the deduction do not include amounts paid during any month or part of a month covered by the other plan. Thus, Drew and Sherry can deduct $3,500 ($500 monthly insurance payment × 7 months).

Answer 26

Life insurance with owner as beneficiary. A taxpayer may not deduct premiums on a life insurance policy covering the taxpayer, an employee, or any person with a financial interest in the taxpayer’s business if the taxpayer is directly or indirectly a beneficiary. Insurance premiums paid on a taxpayer’s own life are personal expenses and are not deductible.

Answer 27

$0 Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Insurance premiums paid for carrying on a trade or business are deductible. The 1-year policy that pays C for lost earnings is personal; thus the premiums are not deductible as a trade or business expense. The premiums paid for the 1-year life insurance policy on the key employee are not deductible since C is the beneficiary [Sec. 264(a)]. The premiums on the 1-year life insurance policy on C’s own life are also not deductible because the policy is personal even though required by the bank for C to obtain a business loan. The premiums paid on the 2-year fire and theft policy will be deductible, but not until the year the policy is effected and even then, only on an allocated basis (Publication 535, Chapter 6, “Prepayment”).

Answer 28

$3,800 Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Insurance premiums paid for carrying on a trade or business are deductible. Under the terms of a use and occupancy insurance contract, a taxpayer may be insured for the loss of the use and occupancy of property damaged by fire. This expense is deductible. Premiums paid for overhead insurance are also deductible. Guaranteed payments are recorded as income by the partners and are deductible by the partnership. The deduction for the group term life insurance is not available because the partnership is the beneficiary. Finally, insurance premiums paid on a taxpayer’s own life are personal expenses and are not deductible. Therefore, the amount of WHOOS’s deductible expense for the current year is $3,800 ($2,000 business interruption insurance + $1,000 overhead insurance + $800 accident and health insurance).

Answer 29

$3,400 An ordinary and necessary trade or business insurance expense paid or incurred during the tax year is deductible, including fire insurance and liability insurance. Prepaid insurance expenses must be apportioned over the period of coverage. Therefore, the 2020 portion of the premium paid for fire insurance is $1,200 ($2,400 ÷ 2 years). The total amount of insurance deductible for 2020 is $3,400 ($2,200 + $1,200).

Answer 30

$1,500 A premium paid for insurance against losses from fire, accident, storm, theft, or other casualty is deductible if it is an ordinary and necessary expense of a business. However, the premiums here are not deductible until paid in 2020 because James is a cash-basis taxpayer. Furthermore, the premiums will have to be apportioned over the 3-year period of the policy but cannot be deducted before they are paid. The amount deductible in 2020 is $1,500 ($1,200 pro rata portion for the 12 months of 2020 + $300 pro rata portion for the 3 months of 2019).

Answer 31

$100 A premium paid for insurance against losses from fire, accident, storm, theft, or other casualty is deductible if it is an ordinary and necessary expense of a business. When an insurance premium is paid in advance for more than 1 year, only a pro rata portion of the premium is deductible for each year, regardless of the taxpayer’s method of accounting. A portion of the premium paid in Year 1 is deductible in Year 2. On the Year 1 return, only the part of the total premium that applies to the 2 months of coverage in Year 1 is deductible. Therefore, the permitted deduction is $100 [($1,200 ÷ 24 months) = $50 × 2 months].

Answer 32

$700 A premium paid for insurance against losses from fire, accident, storm, theft, or other casualty is deductible if it is an ordinary and necessary expense of a business. When an insurance premium is paid in advance for more than 1 year, only a pro rata portion of the premium is deductible for each year, regardless of the taxpayer’s method of accounting. Thus, the portion of the premium that may be deducted in 2020 is the 7 months the policy covered in 2020, i.e., $700 [($2,400 premium ÷ 24 months) × 7 months].

Answer 33

Employee fidelity or performance bonds. Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. An expense is ordinary if it is customary in the kind of business conducted by the taxpayer and is not capital in nature. An expense is necessary if it is appropriate and helpful. Insurance to cover losses from employee malfeasance or nonperformance qualifies as such an expense.

Answer 34

$7,000 A business bad debt is one incurred or acquired in connection with the taxpayer’s trade or business. The two loans to her clients are treated as business bad debt because these loans are associated with her business. Since Jennifer provided free legal advice to her cousin, this loan is a nonbusiness bad debt because there is no connection to her business. Thus, $7,000 is the business bad debt.

Answer 35

A note evidencing an uncollectible business loan. An uncollectible business loan is a business bad debt under Sec. 166. Therefore, it is deductible.

Answer 36

Business bad debt. A business bad debt is deductible in full as an ordinary loss under Sec. 166. A loss on a guarantee of a debt is treated the same as a primary debt in determining whether it is business or nonbusiness. To be a business bad debt, it must be closely related to one’s trade or business. However, guaranteeing the debt of a primary customer does not necessarily make it a business debt. If making the guarantee was required to retain the customer, the payment on the guarantee would be a business bad debt.

Answer 37

This method can be used only by cash-basis taxpayers. Under the nonaccrual-experience method of accounting, a taxpayer does not have to accrue income that (s)he does not expect to collect. This method applies only to amounts to be received as accounts receivable for services performed. It cannot be used if amounts are owed to a taxpayer from activities such as lending money, selling goods, or acquiring receivables. Also, it cannot be used for amounts owed to a taxpayer if the taxpayer charges interest or late penalties. This method may be used by taxpayers who are not cash method; it does not apply to cash-method taxpayers as they already receive this treatment under standard cash-method rules.

Answer 38

A gift. 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 [Reg. 1.166-1(c)]. Ms. R made a gift to her sister of the balance of the debt owed. Therefore, no bad debt exists, and no deduction is available.

Answer 39

$20,000 A business bad debt is a loss from worthless debt that was either *Created or acquired in the taxpayer’s trade or business or *Closely related to the taxpayer’s trade or business when it became partially or totally worthless. A debt is closely related to a taxpayer’s trade or business if the primary motive for incurring the debt is business related. If a taxpayer makes a loan to a client, supplier, employee, or distributor for a business reason and it becomes worthless, it becomes a business bad debt (Publication 535). Since the Flap Jack Partnership only received $10,000, the partnership has a business bad debt of $20,000 ($30,000 note – $10,000 payment).

Answer 40

$4,000 A partially worthless nonbusiness debt is not deductible (Reg. 1.166-5), and a wholly worthless nonbusiness debt is treated as a loss from the sale or exchange of a capital asset held for 1 year or less, i.e., a short-term capital loss [Sec. 166(d)]. Notice that the Sec. 1211 limit of $3,000 for a capital loss deduction is not reached in this problem since only the loan to B creates a capital loss. Partially worthless business debts may be deducted under Sec. 166(a) to the extent they are specifically written off. Landon’s bad debt deduction is A $0 B $1,000 C $1,000 D $2,000 Deduction $4,000 Of the loss, $1,000 is a short-term capital loss, and $3,000 is a business bad debt deduction that reduces ordinary income.

Answer 41

This method provides that, if accounts receivable are uncollectible, they are not included in gross income for the tax year. Under the nonaccrual-experience method of accounting for bad debts, a taxpayer does not have to accrue income that is not expected to be collected. This method applies only to accounts receivable for services the taxpayer performs. This method cannot be used for amounts earned by selling goods or for amounts owed for which the taxpayer charges interest or late penalties. Also, the nonaccrual-experience method does not apply to cash-basis taxpayers.

Answer 42

Worthless trade receivable. An accrual-basis taxpayer includes trade receivables in gross income, and a worthless trade receivable is deductible as a business bad debt under Sec. 166(a).

Answer 43

A $4,000 deduction for bad debts and does not have to include any portion of the “reserve” in taxable income. An accrual basis taxpayer includes trade receivables in gross income, and a trade receivable is deductible as a business bad debt to the extent it is worthless. The allowance method of deducting bad debts is not allowed, so Gary must use the specific write-off method.

Answer 44

A worthless note receivable. An accrual-basis taxpayer includes notes receivable in gross income, and a worthless note receivable is deductible as a business bad debt under Sec. 166(a).

Answer 45

Cash-basis taxpayers can take a deduction for amounts never received or collected. A taxpayer may deduct a loss from a bad debt only if (s)he has a basis in the debt. For this reason, cash basis taxpayers who normally do not report income until it is required are not entitled to deductions for payments they cannot collect. Their loss is represented by the unrecovered expenses incurred in providing the goods or services.

Answer 46

Bill can deduct his business bad debt as a short-term capital loss. 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.

Answer 47

This method can be used for amounts to be received that are earned from any source. An accrual method of accounting taxpayer meeting certain qualifications may use the nonaccrual-experience method of accounting for bad debts [Sec. 448(d)(5)]. The nonaccrual-experience method may be used only for amounts to be received for the performance of services that would otherwise be included in income. This method may not be used for amounts to be received from activities other than the performance of services. Amounts arising from lending money, selling goods, or acquiring receivables from other parties would not be eligible for treatment under the nonaccrual-experience method.

Answer 48

$0 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 [Reg. 1.166-1(c)]. The taxpayer either made a gift to her son of the balance of the debt owed or released the debt in consideration of her son’s agreement to enter the business. Therefore, no bad debt exists, and no deduction is available.

Answer 49

$6,000 Publication 535 states, “A business bad debt is a loss from the worthlessness of a debt that was either *Created or acquired in your trade or business, or *Closely related to your trade or business when it became partly or totally worthless. A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. . . . If you make a loan to a client, supplier, employee, or distributor for a business reason and it becomes worthless, you have a business bad debt.” The loans to both partnerships improved Mary’s business, so they are deductible. However, Mary’s loan to Sarah is not deductible because it was made for personal reasons instead of business reasons.

Answer 50

$3,500 Dr. K has consistently reported income and expenses on the cash basis, and cash and checks received are deposited and included in income. Therefore, the $2,000 in accounts receivable has not been included in income, and accordingly, no deduction will arise from uncollectible receivables. The recovery of an uncollectible receivable from 3 years ago of $1,000 will be included in income and will not be netted against bad debt expense. Bad debt expense for the current year will be $3,500; the $500 in returned checks has been included in income, so a bad debt deduction is proper, and the $3,000 business bad debt is also deductible.

Answer 51

$1,550 Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. However, items clearly of an advertising nature, such as clipboards with the company name, that cost $4 or less do not figure in the $25 limitation. The clipboards costing $3 are fully deductible. The 50 bottles of wine are deductible up to $25 each, for a total amount of $1,250 (50 bottles at $25 each). Thus, the total amount of deductible business gifts is $1,550 ($300 + $1,250).

Answer 52

$0 The law firm is a specified service trade or business from which the taxpayer is not allowed to claim the deduction when taxable income exceeds the upper threshold. Because Kevin has a taxable income greater than $213,300, the disallowance rule applies. Thus, Kevin is not allowed a QBI deduction.

Answer 53

Payments made by a physician to another physician in consideration of the referral of a Medicare patient are deductible business expenses. The payments made by a physician to another physician in consideration of the referral of a Medicare patient are not deductible business expenses. In general, bribes and kickbacks, including Medicaid and Medicare referrals, are not deductible business expenses.

Answer 54

A penalty for late performance of a contract. Penalties paid for late performance or nonperformance of a contract are generally deductible. However, penalties or fines paid to any government agency or instrumentality due to a violation of the law are not deductible.

Answer 55

$1,450 Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. However, items clearly of an advertising nature, such as pens embossed with the company name, that cost $4 or less do not figure in the $25 limitation. Since none of the employees of the receiving companies were to receive more than one gift, each gift given to each company employee is deductible up to $25. The pens costing $4 each are completely deductible. The 25 bottles of wine are deductible up to $25 each, or an amount of $625 (25 bottles at $25 each). The wrapping is completely deductible because incidental costs such as gift wrapping, mailing, and delivery of gifts and certain imprinted gift items costing $4 or less are excluded. The floral arrangements are also fully deductible. The total amount of deductible business gifts is $1,450 [$400 + $625 (25 bottles at $25 each) + $50 + $375].

Answer 56

I, II, and III. Payers withhold Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. The service contract states or implies that substantially all the services are to be performed personally by the statutory employees. The statutory employees do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities). The services are performed on a continuing basis for the same payer.

Answer 57

I, II, and III. Business expense of an office located in a taxpayer’s residence is deductible if the office is used exclusively and on a regular basis as the taxpayer’s principal place of business (Sec. 280A). For tax years beginning after December 31, 1998, a home office qualifies as a principal place of business if (1) the office is used by the taxpayer to conduct administrative or management activities of the taxpayer’s trade or business, and (2) there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities for the trade or business.

Answer 58

$1,250 Because John’s taxable income is greater than $213,300, the W-2/qualified property limit applies. Thus, for the sole proprietorship, the deductible amount is limited to the lesser of (1) 20% of QBI, $20,000 ($100,000 × 20%), or (2) 2.5% of the unadjusted basis of qualified property, $1,250 ($50,000 × 2.5%). Thus, John can claim $1,250 under the Sec. 199A deduction for the sole proprietorship.

Answer 59

$0 Under Sec. 280A, no deduction is allowable with respect to a dwelling unit used during the year as a residence. There is an exception for regular and exclusive use of a portion of the dwelling unit as a principal place of business of the taxpayer. In this case, Kilgore did not use the bedroom exclusively as an office; therefore, no deduction is allowable. If Kilgore had used the bedroom exclusively as an office, a ratable portion of the rent and utilities would be deductible since it met the requirements for being her principal place of business.

Answer 60

$200 The deduction of otherwise nondeductible expenses, with depreciation taken last, is limited to gross income minus those allowed regardless of business or personal use and those allocable to the trade or business that are not home office expenses. Any amount in excess of the limit may be carried over. Gross income from business $6,000 Minus: Deductible mortgage interest and real estate taxes (20%) $3,000 Business expenses not related to the use of the home (100%) (business phone, supplies, and depreciation on equipment) $2,000 Deduction limit $1,000 Minus other expenses allocable to business use of home: Maintenance, insurance, and utilities (20%) $800 Depreciation allowed (20% = $1,600 allowable, but subject to balance of deduction limit) $200 Other expenses up to the deduction limit $1,000 Depreciation carryover ($1,600 – $200) $1,400

Answer 61

$125 Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. Since Jennifer gave five gifts to five employees, she is allowed to deduct $25 per recipient, or $125.

Answer 62

Patent that you created, but not in connection with the acquisition of assets constituting a trade or business or a substantial part of a trade or business. Under Sec. 197, the cost of acquiring any intangible assets, including non-compete covenants, is amortizable over a 15-year period, beginning in the month of acquisition. The actual useful life of the covenant is ignored. Section 197(c)(2) states that, generally, a Sec. 197 intangible created by the taxpayer is not amortizable unless it is created in connection with a transaction or series of related transactions that involves the acquisition of assets constituting a trade or business or a substantial part of a trade or business.

Answer 63

$10,000 Land is a business asset that must be capitalized. Environmental clean-up costs are treated as land and capitalized. The cost of moving machinery from one location to a new location is deductible as a business expense.

Answer 64

The greater of 50% of the W-2 wages with respect to the qualified trade or business or 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property. For each qualified trade or business of a taxpayer, the deductible amount is limited to the lesser of (1) 20% of the taxpayer’s QBI with respect to the qualified trade or business or (2) the W-2 wages/qualified property limit, which is the greater of (a) 50% of the W-2 wages with respect to the qualified trade or business or (b) 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

Answer 65

All of the answers are correct. For a taxpayer to deduct expenses for the business use of his or her home under Sec. 280A, the taxpayer must use part of the home exclusively and regularly (1) as the principal place of business for the trade or business; (2) as a place to meet or deal with patients, clients, or customers in the normal course of the trade or business; or (3) in connection with the trade or business, if a separate structure is used that is not attached to the home. A home office qualifies as a principal place of business if (1) the office is used by the taxpayer to conduct administrative or management activities of the taxpayer’s trade or business and (2) there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business. Since Travel is using a separate structure not attached to his home, regularly and exclusively, in connection with his business, he may deduct expenses allocable to the business use of his home.

Answer 66

$200 Under Sec. 280A, a deduction for the business use of a dwelling unit also used as a residence is allowed only if a portion of the unit is used exclusively on a regular basis as the principal place of business or as a place of business to meet with patients or customers, or if it is a separate structure that is used in connection with the taxpayer’s trade or business. The expenses of the residence must be apportioned based on the area used exclusively for business. Sherry’s business portion is 20%. However, the business deduction is limited to net income from the business activity (not taking into account expenses of the home) less the expenses deductible regardless of the business activity, e.g., interest and taxes. Under Prop. Reg. 1.280A-2(i)(5), expenses deductible only as a result of business use that are not adjustments to basis are deducted first, and then those business deductions affecting basis (e.g., depreciation) are deducted. ``` Net income $ 3,000 Mortgage interest ($7,000 × 20%) $(1,400) Taxes ($4,000 × 20%) $(800) 20% of maintenance, insurance, utilities $(600) Limitation on depreciation $200 ```

Answer 67

Influence. Influence is not one of the three factors that employers must consider when determining whether a worker is an employee or independent contractor. The three factors are behavioral, financial, and type of relationship.

Answer 68

Allocable losses associated with a qualified trade or business. QBI includes any items of income, gain, deduction, and loss to the extent that such items are effectively connected with the conduct of a trade or business within the United States and are included or allowed in determining taxable income for the taxable year.

Answer 69

$25 Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. Although Mr. Lamar gave Mr. Bennett $37 worth of gifts, only $25 is deductible.

Answer 70

The cost of a license granted by a governmental unit or agency including issuances and renewals is an immediately deductible business expense. A license granted by a governmental unit or agency including issuances and renewals is a Sec. 197 intangible. These licenses are to be capitalized and then amortized.

Answer 71

Seller whose remuneration is based on hours worked. A safe harbor is provided for certain real estate agents and direct sellers to be classified as independent contractors, but the seller’s remuneration must be directly related to the sales or output and not be based on hours worked (Sec. 3508).

Answer 72

$63,750 Because Tyler and Ross do not have any qualified property, the QBID allowed amount for this qualified trade or business is limited to the lesser of 20% of the taxpayer’s QBI with respect to the qualified trade or business or 50% of the W-2 wages with respect to the qualified trade or business. Because their taxable income of $431,200 is greater than $426,600, the W-2 wages/qualified property limit needs to be considered. Thus, their deduction is limited to the lesser of 20% of QBI ($66,920) or 50% of W-2 wages with respect to the partnership ($63,750). Tyler and Ross can claim a deduction of $63,750.

Answer 73

$89,000 QBI is the net amount of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer conducted within the United States and included or allowed in determining taxable income for the taxable year.

Answer 74

I, II, and III. Payers withhold Social Security and Medicare taxes from the wages of statutory employees if all three conditions apply.

Answer 75

Generally, any personal use of the business portion of the home by anyone results in complete disallowance of the deductions. Any personal use of the business portion of the home by anyone results in complete disallowance of the deductions. There are two exceptions to the exclusive-use test: 1. A retailer or wholesaler whose sole location of the business is the retailer’s/wholesaler’s home need not meet the exclusive-use test. 2. If the business portion of a home is used to offer qualifying day care, the exclusive-use test need not be met.

Answer 76

$1,000 ``` Section 280A disallows a business expense deduction for an office located in the taxpayer’s residence unless the office is used exclusively and on a regular basis as the taxpayer’s principal place of business or as a place of business to meet with patients, clients, or customers. In addition, the allowable business expense deduction may not exceed the excess of the net income from the business activity (not taking into account expenses of the home) over the deductions allowable whether or not the home was used for business purposes, e.g., interest and taxes. Net income $1,000 Less expenses allowable whether or not home is used for business: Taxes $1,800 Interest $2,400 ``` $4,200 × 20% = (840) Mr. Henson’s allowable deductions $160 The total allowable deductions are $1,000 ($840 taxes and interest + $160 insurance and utilities). No deduction is available for any of the depreciation since the insurance and utilities allocable to the office [($450 + $350) × 20% = $160] exactly equal the $160 amount of other deductions that can be deducted [Prop. Sec. 1.280A-2(i)].

Answer 77

Relieved from having to pay taxes for that worker. If an employer has a reasonable basis for not treating a worker as an employee, the employer may be relieved from having to pay taxes for that worker. To get this relief, the employer must file all required federal information returns on a basis consistent with the employer’s treatment of the worker. The employer must not have treated any worker holding a substantially similar position as an employee for any period beginning after 1977.

Answer 78

$0 Employers may deduct up to $400 in employee achievement awards as part of a nonqualified plan. The total limit is $1,600 for qualified plans. However, the award plan is not qualified since the average award is $717 [($250 + $1,500 +$400) ÷ 3], which exceeds the $400 limit. Therefore, the qualified plan deductible amount is $0. However, the employer may still take a $400 unqualified plan deduction.

Answer 79

Penalty for late delivery of cargo paid to Corporation V. Although fines and penalties paid to a government are generally not deductible, the payment of a penalty for nonperformance of a contract is generally deductible. This penalty usually represents damages that one contracting party was willing to incur in order to avoid performing under the contract. This is a business decision, and the damages are deductible under Sec. 162(a).

Answer 80

$2,450 Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. Since none of the employees of the receiving companies were to receive more than one gift, each gift to each company employee is deductible up to $25. The engraving is completely deductible because incidental costs such as gift wrapping, mailing, and delivery costing $4 or less are excluded. The amount of deductible business gifts is $2,450 [$200 + $400 + $500 (20 floral arrangements at $25 each) + $1,250 + $100].

Answer 81

Deduct $5,000 and amortize the remaining $5,000 over 180 months. A limited amount of organizational costs are deductible in the current period. The remaining balance is capitalized and amortized proportionally over the 180-month (15-year) period beginning with the month in which the active trade or business begins. Examples of organizational costs include drafting a corporate charter or partnership agreement, by-laws, minutes of organizational meetings, accounting services, and fees paid to the state. Taxpayers can deduct up to $5,000 of organizational expenditures in the taxable year in which the business begins. Thus, $5,000 would be deductible in 2020, and the remaining $5,000 would be amortized over 180 months (15 years).

Answer 82

$125 Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. Since William gave five gifts to five executives, he is allowed to deduct $25 per recipient, or $125.

Answer 83

Persons engaged in appraisal activities for real estate sales who earn income based on sales or other output. Persons engaged in appraisal activities for real estate sales who earn income based on sales or other output are classified as licensed real estate agents, not direct sellers. Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting.

Answer 84

$1,500 There are three categories of deductions for taxpayers using all or a portion of their home for business: 1. Itemized deductions 2. Ordinary and necessary business expenses that are unrelated to the qualified business use 3. Expenses for business use of a home If the simplified option is selected for the third category (i.e., expenses for business use of a home), the taxpayer simply multiplies the square footage of the business-use portion (maximum of 300 sq. ft.) by $5. B’s simplified option expenses for business use of his home is $1,500 (300 sq. ft. × $5). No deduction for depreciation is allowed under the simplified option.

Answer 85

If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried over to the next year. If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried over to the next year.

Answer 86

Lee is paid weekly by Sew. An employee is any person who is hired by another person or business for a wage or fixed payment in exchange for personal services and who does not provide these services as part of an independent business. Additional characteristics of employment are determined on a case-by-case basis. Thus, weekly payment is the best indicator that Lee is an employee.

Answer 87

$1,820 ``` Since Mr. Langley uses 30% of his residence exclusively for business purposes, he may deduct 30% of the expenses of his residence plus any expenses directly applicable to the business. The deduction is limited to the excess of the net income derived from his business activity (not taking into account expenses of the home) over the deductions allowable whether or not the home was used for business purposes, e.g., interest and taxes. This limit is $1,820 as computed below. Since the other home expenses are $3,330 ($750 utilities + $180 insurance + $2,400 depreciation), he will have a $1,510 ($3,330 – $1,820) expense carryover to the next year with no profit or loss from the business in the current year. Net income $3,500 Less: Interest ($4,000 × 30%) $(1,200) Taxes ($1,600 × 30%) $(480) Limit on other deductions $1,820 ```

Answer 88

$1,200 Under Sec. 280A, a deduction for the business use of a dwelling unit also used as a residence is allowed only if a portion of the unit is used exclusively on a regular basis as the principal place of business or as a place of business to meet with patients or customers, or if it is a separate structure that is used in connection with the taxpayer’s trade or business. The expenses of the residence must be apportioned based on the area used exclusively for business. Mr. G’s business portion is 40% (800 ÷ 2,000 feet). However, the business deduction is limited to net income from the business activity (not taking into account expenses of the home) less the expenses deductible regardless of the business activity, e.g., interest and taxes. Under Prop. Reg. 1.280A-2(i)(5), expenses deductible only as a result of business use that are not adjustments to basis are deducted first, and then those business deductions affecting basis (e.g., depreciation) are deducted. ``` Net income $10,000 Mortgage interest ($15,000 × 40%) $(6,000) Taxes ($2,500 × 40%) $(1,000) Utilities ($2,000 × 40%) $(800) Insurance and maintenance ($2,500 × 40%) $(1,000) Limitation on depreciation $1,200 ```

Answer 89

$55,000 Qualified business income are items of income, gain, deduction, and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States; it does not include wages and foreign income. Thus, Tom has qualified business income of $55,000.

Answer 90

$3,670 ``` Professional fees are deductible under Sec. 162, the same as compensation to an employee, provided they are reasonable in amount. Advertising and bank service charges are deductible as general expenses. Office supplies are also deductible under Reg. 1.162-3. Section 461(g) requires prepaid interest to be capitalized and allocated to the periods to which it relates. Since the interest was prepaid for 5 years, only one-fifth of the interest may be deducted in the current year. Bank service charges $70 Office supplies $100 Advertising $600 Professional fees $2,400 Interest ($2,500 × 1/5) $500 Deductible business expenses $3,670 ```

Answer 91

$525 The meal expense deductible is $400 (50%), and the deduction for gifts to clients is limited to $25 per person. Here, the Garlands gave each of five clients an $80 gift. The Garlands may deduct $125 of this $400 gift expense.

Answer 92

$10,000 Because Shirley’s taxable income of $150,000 is less than $163,300, the W-2 wages/qualified property limit does not apply. Therefore, the deductible amount equals 20% of QBI, or $10,000.

Answer 93

Is a program to reclassify workers as employees. The VCSP is an optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements; apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program; and enter into a closing agreement with the IRS.

Answer 94

$75 Expenditures for business gifts are deductible. The deduction is limited to $25 per recipient per year. Hal may deduct $75 (3 recipients × $25) for business gifts. The ticket would be entertainment since he took the customer to the game. Thus, the cost of tickets would be nondeductible. If it were a gift, the limit would be $25. It can be classified as a gift if you did not accompany the customer. The gift to the son of the owner is considered given to the owner.

Answer 95

QBI $50,000 W-2 Wages $40,000 Qualified Property $20,000 The taxpayer should take into account his or her allocable share of each qualified item of income, gain, deduction, and loss; only allocable share of the taxpayer’s wages and qualified property should be taken into account to calculate the W-2 wages/qualified property limit. Because Robin is a one-third owner, his allocable share of QBI is $50,000 ($150,000 ÷ 3), his allocable share of W-2 wages is $40,000 ($120,000 ÷ 3), and his allocable share of qualified property is $20,000 ($60,000 ÷ 3).

Answer 96

$25,000 The combined QBID allowed amount is the sum of the amount for each qualified trade or business carried on by the taxpayer. Because Robin and Monica’s income is less than $326,600, the W-2 wages/qualified property limit does not apply. Thus, their QBID allowed amount for the sole proprietorship is 20% of QBI, $10,000 ($50,000 × 20%), and their QBID allowed amount for the S corporation is 20% of QBI, $15,000 ($75,000 × 20%). Therefore, the combined qualified business income deduction is $25,000 ($10,000 + $15,000).

Answer 97

Legal fees paid to acquire a new office building are ordinary and necessary expenses directly related to operating your business and are deductible as business expenses. Amounts paid to acquire tangible property (that must be capitalized) must also be capitalized. Thus, the legal fees would be capitalized as part of the basis of the building and depreciated over 39 years.

Answer 98

$1,250 Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. However, items clearly of an advertising nature, such as pens embossed with the company name that cost $4 or less, do not figure in the $25 limitation. Since none of the employees of the receiving companies were to receive more than one gift, each gift given to each company employee is deductible up to $25. The pens costing $4 each are completely deductible. The 25 bottles of wine are deductible up to $25 each, or an amount of $625 ($25 bottles at $25 each). The wrapping is completely deductible because incidental costs such as gift wrapping, mailing, and delivery of gifts and certain imprinted gift items costing $4 or less are excluded. The floral arrangements are also fully deductible. The total amount of deductible business gifts is $1,250 [$200 + $625 (25 bottles at $25 each) + $50 + $375].

Answer 99

$1,000 The reserve for anticipated expenses is not deductible in the current year. The taxpayer also may not deduct the expenses paid for admission to the inaugural ball. Political contributions, even indirect contributions such as attending a fundraiser, are generally not deductible. In addition, the taxpayer may not deduct either the demolition expenses or the undepreciated basis of the demolished building. However, these expenses may be added to the basis of the land. Although there is generally a denial of deduction for lobbying expenses, there is an exception for up to $2,000 of lobbying expenses. The taxpayer may deduct the $1,000 expense paid to influence the legislation of the local city council.

Answer 100

A soda beverage distribution driver who performs all the services on a continuing basis for the same payer, and does not own any of the equipment. If workers are independent contractors under the common-law rules, such workers may still be treated as employees by statute for certain employment tax purposes. An example of a statutory employee is a driver who distributes beverages (other than milk) if the driver is the payer’s agent or is paid on commission. Other requirements include substantial performance of all services, no substantial investment in the equipment, and the continual performance of the services.

Answer 101

$50,000 Lana and Luke’s taxable income is less than $326,600, and they can simply deduct 20% of qualified business income, $50,000 ($250,000 × 20%). The limitations and disallowance do not apply at this taxable amount.

Answer 102

$75 Expenditures for business gifts are deductible. They must be ordinary and necessary. Deduction is limited to $25 per recipient per year for items excludable from income. The total amount of deduction allowed is $75 (3 × $25). You may only deduct $25 for each bottle given to the three recipients.

Answer 103

Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party. Section 162(e) provides that contributions to a political party or candidate are not deductible as business expenses. The proceeds from the convention program are for the use of a political party. Therefore, the expenses incurred to advertise in that program are not deductible.

Answer 104

No profit or loss from business and an $800 expense carryover to the next year. ``` Since Mrs. Neal uses 25% of her residence exclusively for business purposes, she may deduct 25% of the expenses of her residence plus any expenses directly applicable to the business. The deduction is limited to the excess of the net income derived from her business activity (not taking into account expenses of the home) over the deduction allowable whether or not the home was used for business purposes, e.g., interest and taxes. This limit is $850 as computed below. Since the other home expenses are $1,650 ($350 maintenance, insurance, and utilities + $1,300 depreciation), she will have an $800 ($1,650 – $850) expense carryover to the next year with no profit or loss from the business in the current year. Gross income $4,500 Less: Supplies $(2,400) 25% of interest $(750) 25% of taxes $(500) Limit on other deductions $850 ```

Answer 105

$325 Only $200 (50%) of the meal expense is deductible, and the deduction for gifts to clients is limited to $25 per person. Here, the Crowells gave each of five clients a $40 gift. The Crowells may deduct $125 of this $200 gift expense.

Answer 106

Indirect buyers. There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters.

Answer 107

$0 There are three categories of deductions for taxpayers using all or a portion of their home for business: 1. Itemized deductions 2. Ordinary and necessary business expenses that are unrelated to qualified business use 3. Expenses for business use of a home If the simplified option is selected for the third category (i.e., expenses for the business use of a home), the taxpayer simply multiplies the square footage of the business-use portion by $5. However, no deduction for depreciation is allowed under the simplified option. Jonathan’s basis for Year 1 depreciation is $10,000 (i.e., cost allocation).

Answer 108

$14,000 Because Hannah’s taxable income is less than the $163,300 threshold amount, the W-2 wages/qualified property limit does not apply. Thus, for this partnership, there is a deduction equal to 20% of qualified business income ($70,000), $14,000.

Answer 109

C corporations. The QBI deduction is available to noncorporate taxpayers who have qualified business income from qualified pass-through entities. Qualified pass-through entities include sole proprietorships, S corporations, partnerships, trusts, and estates.

Answer 110

$1,000 The reserve for anticipated expenses is not deductible in the current year. Bribes and kickbacks are also not deductible. Political contributions, even indirect contributions such as attending a fund raiser, are generally not deductible. Generally, lobbying expenses may not be deducted. This includes expenses incurred to influence legislation. However, there is an exception to the rule. The lobbying expense limitation does not apply to any in-house expenditure for any tax year if the expenses do not exceed $2,000. In-house expenditures are expenses paid or incurred for the purpose of influencing legislation. Thus, the taxpayer may deduct the $1,000 expense paid in order to submit statements to the U.S. Congress.

Other Deductions Flashcards

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