Study Unit 6

Question 1

Who usually reports self-employment income?

Answer 1

• Sole proprietors

- Independent contractors

Question 2

What are the three requirements for an expense from a trade or business to be deductible from self-employment income?

Answer 2

• Ordinary
• Necessary
• Reasonable

Question 3

Under what scenarios are domestic travel expenses in an employment-related context not deductible?

Answer 3

Travel expenses are deductible while away from home overnight on business except for

- Travel that is primary personal in nature
- Travel expenses of the taxpayer’s spouse
- Commuting between home and work
- Attending investing meetings
- Travel as a form of education

Question 4

Under what scenarios are foreign travel expenses in an employment-related context not allocated between personal purposes and business purposes?

Answer 4

• The trip is not more than 1 week
• Personal vacation was not the major consideration
• Personal time spent is less that 25% of the total time away from home

Question 5

When are business bad debts deductible?

Answer 5

For tax purposes, the specific write-off method must be used - deducting bed debts only when determined to be worthless (written off), not when the allowance is established (allowance method).

Question 6

How are start-up costs and organizational costs deducted from income?

Answer 6

Range Deduction

$50,000 1. Reduce the $5,000 currently deductible amount by costs over $50,000

											2. Deduct the currently deductible amount
											3. Capitalize remainder and amortize over 180 months

NOTE: Taxpayers can deduct up to $5,000 of start-up costs and $5,000 of organizational expenses.

Question 7

Describe how the rental use test and the personal use test determine how rental income and expenses are accounted for.

Answer 7

If rental is >14 days and personal use is <14days or <10 days - it is considered rental property - Rental income is reported and rental expenses are deducted.

If rental is >14 days and personal use is treated of >14 days or >10% - it is considered a vacation home - rental expense deduction may not exceed rental income.

If rental is <14 days - personal use is not a consideration - it is considered a residence - rental income is not reported and rental expenses are not deducted.

Question 8

How is the employer’s portion of FICA calculated?

Answer 8

The employer’s portion of FICA tax is the sum of 2 tiers:

Tier Employee’s Wages (for 2021) FICA Tax

1 $0 to $142,800 Wages x 7.65%

2 $142,800 or above Wages x 1.45%

Question 9

How is the employee’s portion of FICA tax calculated?

Answer 9

The employee’s portions of FICA tax is the sum of 3 tiers:

Tier Employee’s Wages (for 2021) FICA Tax

1 $0 to $142,800 Wages x 7.65%

2 $142,800 to $200,000 Wages x 1.45%

3 above $200,000 Wages x 2.35%
($250,000 MFJ, $125,000 MFS)

Question 10

How is the net investment income tax (NIIT) calculated?

Answer 10

NIIT = 3.8% x lesser of (1) Net investment income or
(2) Modified adjusted gross income - Threshold

Filing Status Threshold Amount
Single, head of household $200,000
Married filing jointly, surviving spouse $250,000
Married filing separately $125,000

Question 11

How is self-employment tax calculated?

Answer 11

Self-employment tax is the sum of 3 tiers.

Tier Employee’s Wages (for 2021) FICA Tax

1 $0 to $142,000 Net earnings from self-employment x 15.3%

2 $142,800 to $200,000 Net earnings from self-employment x 2.9%

3 Above $200,000 Net earnings from self-employment x 3.8%
($250,000 MFJ, $125,000 MFS)

Question 12

On whom are (1) FICA taxes and (2) FUTA taxes imposed?

Answer 12

FICA taxes are imposed on both employers and employees.

FUTA taxes are imposed on employers only.

Question 13

How is FUTA tax calculated?

Answer 13

FUTA is calculated as follows for each employee:

FUTA = 6.0% x lesser of (1) employee’s wages or (2) $7,000

Question 14

Give examples of nontaxable employee benefits.

Answer 14

• Employee discounts
• De mini is benefits
• Qualified transportation fringe benefits
• Premiums of group term life insurance
• Employee-paid accident and health plans
• Employer-provided educational assistance
• Death benefits
• Meals and lodging
• Incentive stock options
• Cafeteria plans
• No additional cost services

Question 15

To what extent are premiums paid by an employer for group term life insurance excluded from an employee’s gross income?

Answer 15

Coverage of Group Term					Deductible Premium 
Life Insurance								(Paid by Employer)

< $50,000 Full Amount

> $50,000 Premiums for first $50,000 of coverage

Question 16

What are the requirements for an employee to recognize long-term capital gain on incentive stock options?

Answer 16

The employee recognizes long-term capital gain if the stock is sold

• 2 years or more after the option was granted and
• 1 year or more after the option was exercised.