ACC 407 Exam 3
Why is it important to distinguish whether an individual is an employee or an independent contractor (self-employed)?
A. Self-employed individuals receive an income tax deduction equal to 50% of their self-employment tax. Consideration should also be given to the hospital insurance portion of the FICA tax, which continues to apply without limit at a 1.45% rate for both employees and employers and at a 2.9% rate for self-employed individuals. B. It is important to distinguish whether an individual is an employee or an independent contractor (self-employed) because some expenses are only partially deductible by employees or not deductible at all. A self-employed individual who incurs a business-related expenditure may deduct, under Section 162, the expense for determining AGI on Schedule C, Form 1040. C.Employers pay certain payroll taxes on behalf of their employees, whereas, self-employed individuals have to pay both the employer and employee portion of payroll taxes. Therefore, individuals may prefer to be classified as employees because the employee portion of the social security tax rate in 2020 of 7.65% is less than the self-employment tax rate of 15.3%. D.All of the above.
a. For purposes of the charitable contribution deduction, what is capital gain property? Ordinary income property?
Capital gain property is property held over one year upon which a long-term capital gain would be recognized if it were sold at its fair market value on the date of contribution. If a capital loss or a short-term capital gain would be recognized, the property is considered ordinary income property for purposes of the charitable contribution deduction. Ordinary income property also includes property that would result in the recognition of ordinary income if the property were sold.
Dana is an attorney who specializes in family law. She uses the cash method of accounting and is a calendar-year taxpayer. Last year, she represented a client in a lawsuit and billed the client $5,000 for her services. Although she made repeated attempts, Dana was unable to collect the outstanding receivable. Finally, in November of the current year, she finds out that the individual has moved without leaving any forwarding address. Dana's attempts to locate the individual are futile. What is the amount of deduction that Dana may take with respect to this bad debt?
Dana may not take any deduction with respect to this bad debt. Although it is a bad debt that had been incurred in her business, she has no basis in the debt because she is a cash method taxpayer and did not report the receivable in income.
For AGI deductions of individual taxpayers that are connected with either a trade or business or a rental activity are reported differently than other for AGI deductions reported as Adjustments to Income on Schedule 1 of Form 1040. Explain the difference as to how the two groups are reported for tax purposes.
Expenses of a self-employed individual are netted against the income from his business activity and the net amount is reported on Schedule C. The net amount of income from Schedule C is then reported on Line 12 of Schedule 1 of Form 1040. A similar reporting procedure is also followed for Schedule E for rental real estate and Schedule F for a farm. Other types of for AGI deductions are merely listed as Adjustments to Income on Schedule 1 of Form 1040.
Are deductions allowed for entertainment expenses of customers or clients in
For tax years 2018-2025, entertainment expenses are not deductible.
Are the losses suspended under the passive loss rules lost forever? Explain.
Losses suspended under the passive loss rules are not lost forever. The suspended losses are carried over indefinitely and are treated as losses allowable to the activity in the following taxable years. Any suspended losses that still exist when the property or activity is disposed of may be deducted in the year of disposal. These losses are subject to the $259,000 ($518,000 for joint returns) limitation on excess business losses.
Compare and contrast the computational rules for deducting casualty losses on personal-use property with casualty losses incurred on business or investment property.
The casualty loss deduction on personal-use property is limited to the lesser of (1) the taxpayer's basis in the property or (2) the reduction in fair market value. This is the case whether the property is totally or partially destroyed. Casualty losses on personal-use property are reduced by $100 per casualty and then are further reduced by 10% of AGI. The casualty loss deduction on partially destroyed business or investment property is limited to the lesser of (1) basis or (2) reduction in FMV. The amount of the casualty loss deduction for the total destruction of business or investment property is equal to the basis of the property. Casualty losses on business property are not subject to limits and floors.
For individuals, what is the overall deduction limitation on charitable contributions? What is the limitation for corporations?
The overall deduction limitation on charitable contributions for individuals is 60% of the taxpayer's AGI for the year (50% of AGI for property). The limitation for corporations is 10% of taxable income computed without regard to the dividends received deduction, the charitable contribution deduction, or any NOL or capital loss carrybacks.
Describe the usual tax consequences that apply to a worthless security.
The taxpayer must first establish when the security actually became worthless. Once determined, the loss incurred is treated as a loss from the sale of a capital asset on the last day of the taxable year. Under certain circumstances, if a domestic corporation holds worthless securities in an affiliated corporation, the loss to the domestic corporation is treated as having arisen from a sale of a noncapital asset, making the loss an ordinary loss.
For each of the following independent situations, determine whether any of the expenditures qualify as deductible education expenses in connection with a trade or business (Reg. Sec. 1.162-5). Are the expenditures classified as for AGI or from AGI deductions? (If an expense is not deductible, enter "n/a" in the for AGI or from AGI column.)
a. Law school tuition and books for a self-employed individual who works in the income tax business and is pursuing a law degree: $8,000. Not deductible b. Continuing professional accounting education expenses of $1,900 for a self-employed CPA: travel, $1,000 (including $200 meals); registration fees, $800; books, $100. Deductible for AGI c. MBA education expenses for a self-employed individual totaling $25,000: tuition, $23,000; transportation, $800; and books, $1,200. Deductible for AGI d. Bar review courses for a recent law school graduate: $3,000. Not deductible
b. What is the significance of classifying property as either capital gain property or ordinary income property? It is important to make the distinction between capital gain property and ordinary income property because
of the different rules that apply in determining the amount of the charitable contribution deduction. If capital gain property is donated to a public charity, generally the amount of the contribution is its fair market value except for special rules relating to tangible personal property. Ordinary income property contributed to a public charity generally results in a contribution amount equal to the fair market value less the gain that would have been recognized if the property had been sold.
Sarah loans $50,000 to her best friend, John. John uses the money to open a pizza parlor next to the local high school. Three years later, when John still owed Sarah $15,000, John closed the pizza parlor and declared bankruptcy. Discuss the appropriate tax treatment for Sarah.
she must treat the loan as nonbusiness bad debt subject to the short-term capital loss rules. If Sarah has no capital gains for the year, she make take a capital loss deduction of $3,000, and carryover the remainder.
What are the two methods of computing automobile expenses of self-employed taxpayers?
Self-employed individuals can deduct business automobile expenses under either of two methods: the actual expense method or the mileage method. The actual expense method includes gasoline, oil, repairs, and depreciation for the business-use portion of the automobile. The mileage method allows taxpayers to deduct 57.5 cents per business mile. Parking and tolls can be deducted in addition to the amounts computed under both methods. Taxpayers generally must be consistent over the years.