Reg Unit 9

The following 2023 information pertains to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2023: Adjusted gross income -- $34,000 $100 contribution to a recognized political party The Hoyts itemized their deductions. What amount of the $100 political contribution were the Hoyts entitled to claim as a deduction against their 2023 tax?

$0

You are the accountant for Company R, and you are requested to file Form 941, Employer's Quarterly Federal Tax Return for Federal Income Tax Withheld from Wages and for Federal Insurance Contributions Act Taxes, for the third quarter of 2023. Given the following information, what is the total FICA tax due for the third quarter (rounded to the nearest dollar)? X Wages Paid Third Quarter - $ 5,000 Wages Paid First Two Quarters - $ 5,000 Y Wages Paid Third Quarter - 20,000 Wages Paid First Two Quarters - 141,200 Z Wages Paid Third Quarter - 5,000 Wages Paid First Two Quarters - 0

$4,466 See Screenshot.

Bank Corp., a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. For 2023, what percentage of the meal expense may Bank deduct?

50%

The federal Social Security Act A. Excludes professionals such as accountants, lawyers, and doctors. B. Provides for a deduction for Social Security taxes paid by the employee that is available against his or her federal income tax. C. Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions. D. Does not apply to self-employed persons

C. Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions.

Which of the following statements about business meals is true? A. Meals while traveling for business are not deductible. B. The meal is deductible whether or not the taxpayer or their employee is present at the meal. C. The IRS denies deductions for any meal expense for which substantiating evidence is not provided. D. No deduction is allowed for meals that are lavish or extravagant.

D. No deduction is allowed for meals that are lavish or extravagant.

All of the following payments made to employees would be currently deductible as business expenses except A. Reasonable salary paid to a corporate officer owning a controlling interest for services she rendered. B. Lump-sum payment made to the beneficiary of a deceased employee that is reasonable in relation to the employee's past services, i.e., payment equivalent to compensation. C. Vacation pay paid to an employee when the employee chooses not to take a vacation. D. Wages paid to employees for constructing a new building to be used in the business.

D. Wages paid to employees for constructing a new building to be used in the business.

A cash-basis taxpayer made a bona fide, nonbusiness loan to an acquaintance in Year 1. At the end of Year 2, it is determined that the taxpayer will likely be able to collect only 20% of the principal, and no interest has been or will be collected. How should the loss be treated for tax purposes in Year 2?

None of the loss is deductible in Year 2.

Carl's business insurance costs $3,000 per year. Carl paid for and purchased a 12-monthinsurance policy on October 1, Year 1. On October 1, Year 2, Carl's insurance increased to $3,300 per year. A building contract Carl was working on was delayed when they had to obtain additional permitting. Because cash flow was tight, Carl delayed renewing the insurance policy. Instead of making the payment due on October 1, Year 2, Carl paid 3 months of insurance in arrears on January 1, Year 3. Carl is a cash-method taxpayer and took advantage of the 12-month rule in Year 1 for prepayments. What is Carl's insurance expense deduction for Year 2?

$0 Prepaid insurance must be apportioned over the period of coverage. However, a cash-method taxpayer can deduct prepaid premiums if the 12-month rule applies (the contract is for 12 months or less and does not extend beyond the next taxable year). Thus, the $3,000 premium is recognized as insurance expense in Year 1, and $0 is recognized in Year 2.

Willy, a self-employed laboratory consultant, flew to Buffalo where he stayed 3 days (2 days were on business). Airfare was $300, meals were $20 per day, and lodging was $20 per day. From Buffalo, Willy flew to Vancouver, Canada, where he spent 2 weeks on business and 1 week with relatives. Airfare to Vancouver and back home was $600. In Vancouver, food was $100 per week, and lodging was $200 per week. What is Willy's deductible travel expense for the trip?

$1,260 Buffalo: Airfare $ 300 Lodging ($20 × 2 days) 40 Meals ($20 × 50% × 2 days) 20 Vancouver: Airfare ($600 × 2 ÷ 3) 400 Lodging ($200 × 2 weeks) 400 Meals ($100 × 50% × 2 weeks) 100 Total travel expense deduction $1,260

Terry, a self-employed web design consultant, provided consulting services in Paris. Terry's expenses were $1,600 for airfare, $400 for food, and $400 for lodging. Terry spent 5 days at the laboratory and 3 days visiting friends. How much can she deduct for the trip?

$1,375 Airfare ($1,600 × 5 ÷ 8) $1,000 Lodging ($400 × 5 ÷ 8) 250 Meals ($400 × 50% × 5 ÷ 8) 125 Total travel expense deduction $1,375

Dr. Merry, a self-employed dentist, incurred the following expenses: Investment expenses $ 700 Custodial fees related to Dr. Merry's Keogh plan 40 Work uniforms for Dr. Merry and Dr. Merry's employees 320 Subscriptions for medical periodicals used in the waiting room 110 Dental education seminar 1,300 What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business?

$1,730 A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. Dr. Merry's deductible business expenses include work uniforms, subscriptions for medical periodicals related to the trade or business, and the dental education seminar. Thus, total deductible expenses on Schedule C equal $1,730 ($320 + $110 + $1,300).

During the current year, Mr. Y, a cash-basis sole proprietor, paid the following: Base wages to his 4 employees $100,000 Year-end bonuses paid to 2 employees for establishing new sales records 20,000 Employee safety achievement awards to his 4 employees ($50 each) 200 What is the total amount Mr. Y can deduct on his current-year income tax return?

$120,200 Section 162(a)(1) permits a deduction for a reasonable allowance for salaries or other personal services actually rendered, including bonuses. In addition, the $200 of employee safety achievement awards is deductible. Mr. Y may deduct $120,200 on his current-year return ($100,000 base wages + $20,000 bonuses + $200 employee achievement awards).

Given the following wage information, what are the total gross wages subject to Federal Unemployment Tax for the current year? T - 4,200 E - 5,800 M - 22,900

$17,000 Under Sec. 3306(b)(1), wages are taxed for federal unemployment taxes up to $7,000 for each employee. Wages earned in excess of $7,000 are not subject to federal unemployment taxes. The full amount of wages paid during the current year to employee T and employee E is taxable. Only $7,000 of the wages paid to M is subject to federal unemployment taxes. Thus, the total amount of wages paid in the current year that is subject to federal unemployment taxes is $17,000. T- 4,200 E- 5,800 M - 7,000 Total - $17,000

Bob, a calendar-year, cash-basis taxpayer, owns an insurance agency. Bob has four people selling insurance for him. The salesmen incur ordinary and necessary meal expenses for which Bob reimburses them monthly. During the current year, Bob reimbursed his agents $36,000 for meals. How much of the reimbursement can Bob deduct for meal expenses on his current-year federal income tax return?

$18,000 Under Sec. 162(a), an employer may deduct reimbursements to an employee. Bob's deduction for meal expenses is $18,000, as there is a percentage limitation to the deduction of meals (50%).

The following 2023 information pertains to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2023: Adjusted gross income -- $34,000 $100 contribution to a recognized political party The Hoyts itemized their deductions. What amount of the $100 political contribution were the Hoyts entitled to claim as a deduction against their 2023 tax?

$2,000 Costs of business borrowing are generally deductible, but prepaid interest in any form must be amortized over the period of the loan. Only 1 month of the loan has expired, so $2,000 [$24,000 × (1 ÷ 12)] is deductible.

Mr. White is a self-employed artist, his wife is a self-employed designer, and they file calendar-year joint returns. During the current year, Mr. White gave four of his clients gifts costing $40 each. In addition, he gave his accountant, Marianne (who is not his employee), a gift costing $95. During the current year, Mrs. White gave nine of her clients gifts costing $50 each. None of Mrs. White's clients were Mr. White's clients and vice versa. However, Mrs. White used the same accountant, Marianne, and gave her a gift costing $65. What is the amount of the Whites' deductible business gift expense in the current year?

$350 Section 274(b) limits the deduction for gifts to $25 per recipient per year. Husbands and wives are considered to be a single taxpayer and are subject to a single $25 limit. Therefore, the $160 of gifts given to Marianne is limited to $25. The total deduction allowable is $350 (Mr. White's 4 gifts × $25) + (Mrs. White's 9 gifts × $25) + (Marianne's $25).

Phil Armonic is actively engaged in the oil business and owns numerous oil leases in the Southwest. During 2023, he made several trips to inspect oil wells on the leases. As a result of these overnight trips, he paid the following: Plane fares $4,000 Hotels 1,000 Meals 800 Entertaining lessees 500 Of the $6,300 in expenses incurred, he can claim as deductible expenses

$5,400 A deduction is allowed for travel expenses while away from home in the pursuit of a trade or business. Meal expenses are limited to 50% of their cost. Generally, entertainment expenses are not deductible. Assuming that Armonic's expenses meet the business relation requirements, his total deduction is Plane fares $4,000 Hotels 1,000 Meals ($800 × 50%) 400 Total deduction $5,400

On April 1 of the current year, Sam, a cash-basis taxpayer, leased office space from Executive Plaza for 5 years, beginning May 1 of the current year, for $700 per month. During the year, he paid $7,000, of which $1,400 was for advance rent, to Executive Plaza. What is the amount Sam can deduct for the current year?

$5,600 Prepaid rent generally may not be deducted by either a cash-basis or accrual-basis taxpayer. To do so would violate the requirement that the taxpayer's method of accounting must clearly reflect income [Sec. 446(b)]. Furthermore, an expenditure that creates an asset having a useful life extending substantially beyond the close of the taxable year is not deductible [Reg. 1.461-1(a)]. Because the prepayment extends beyond the tax year following the prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply. Only the $5,600 of rental expense allocable to the current year ($7,000 - $1,400) is deductible in the current year.

Mr. B paid the following amounts in the current year in connection with his business property: New motor purchased in December for a truck that extended its useful life by 3 years $ 600 Replacement parts to maintain machinery in efficient operating condition 3,000 Labor to maintain the above equipment 1,800 Cost of replacing gravel driveway with heavy-duty concrete 12,000 Cost of repainting factory building 1,400 What is Mr. B's allowable deduction for repairs and maintenance expense on his current year Schedule C, Form 1040?

$6,200 Repairs and maintenance that do not materially add to the value of property or prolong its life may be deducted. All other expenditures should be capitalized and depreciated (Reg. 1.162-4). The expenditures made for a new truck motor with a useful life of 3 years and the cost of replacing the driveway should be capitalized. The $3,000 cost of replacement parts and the $1,800 in labor costs to maintain the equipment in operating condition are deductible. The $1,400 cost of repainting the factory building is also deductible as a repair and maintenance item. These costs total $6,200 for repair and maintenance expenses, which are deductible in the current year.

Clyde operated a food distribution business. He leased a small warehouse in 2021 for $60,000 per year for a 3-year term. The lease was to start on July 1, 2021. Clyde paid the first 2 years' rent in advance in May 2021. Clyde then began to make monthly payments of $5,000 starting on July 1, 2023, and continuing on the first of the month for the balance of 2023. What rent expense may Clyde claim in 2023?

$60,000 Assuming that Clyde is a cash-basis taxpayer, generally, rental expenses are deductible by a cash-basis taxpayer-lessee in the tax year in which they are paid. However, the general rule does not apply to advance rental payments. Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. Clyde will be able to deduct $60,000 of rent because he can deduct the allocated portion of the $30,000 prepaid rent and the $30,000 of current rent expenses paid. Because the prepayment extends beyond the tax year following prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply.

Gulp Oil Company gives miniature souvenir oil rigs with its name imprinted on them to its suppliers and customers. Each costs the company $2 and is worth $5. Sometimes Gulp Oil gives large quantities of these oil rigs to major wholesalers to be given out to retail customers. Gulp Oil also furnishes display racks to dealers that can be used for both Gulp products and other products. These display racks cost the company $40 and are worth $50. In the current year, 20,000 oil rigs and 500 display racks were given away. How much can Gulp Oil deduct for these gifts?

$60,000 Gifts can constitute a business deduction under Sec. 162(a). They are limited by Sec. 274(b) to $25 per recipient per year. There are exceptions for items that do not cost the taxpayer in excess of $4, and on which the name of the taxpayer is clearly imprinted, and for signs and display racks to be used on the recipient's business premises. These may be given without limit as long as they meet the ordinary and necessary test under Sec. 162(a). Since the miniature oil rigs did not cost more than $4, there is no limit on the deduction for giving them away. Similarly, the display racks are not limited to $25 per recipient. Consequently, the cost of these items may be deducted in full. The total deduction is $60,000 (20,000 × $2 per oil rig) + (500 × $40 per display rack).

On New Year's Eve, Hal sent three bottles of champagne to the three owners of the Day & Night Cleaners to thank them for their business during the year. Each bottle of champagne cost $75. Each of the owners took the champagne home. Earlier in the year, Hal had given a video game to the 10-year-old son of one of the owners. The value of the game was $50. To show his appreciation to another customer for his business, Hal gave the customer tickets to a football game. The value of the tickets for the customer was $100. What is the total amount Hal can deduct as business gifts?

$75 Expenditures for business gifts are deductible. The deduction is limited to $25 per recipient per year. Hal may deduct $75 ($25 × 3 recipients) for business gifts. The gift to the son of one of the owners is considered given to the owner; therefore, the total gift of both the champagne and the video game is limited to $25. The football tickets are considered entertainment and, therefore, cannot be deducted.

Mr. Z, the sole proprietor of Z's Wholesale, transferred an automobile used in his business to Mr. Y, an employee of Z's Wholesale, for business related services rendered during the current year. Z's adjusted basis in the automobile was $6,000 and the fair market value was $8,000 at the time of the transfer. Z had purchased the automobile 2 years ago for $11,000. During the current year, Z paid $80,000 in employee salaries, not including the automobile given to Mr. Y. Z is a cash-basis taxpayer. What is his total salary and wage deduction for the current year?

$88,000 Section 162(a)(1) allows a deduction for reasonable compensation for personal services actually rendered. Section 83(a) allows the deduction to an employer equal to the fair market value of property given to the employee when the property is transferable or is not subject to a substantial risk of forfeiture. Therefore, Mr. Z's salary and wage deduction is $88,000 ($80,000 + $8,000 FMV of car).

Happy Lucky drove her car a total of 18,000 miles during 2023. Of this, 12,000 miles (1,000 per month) were related to business for JR Enterprises. Happy paid $6,000 for gas, $5,500 for repairs, and $2,000 for tires during the year. Happy accounted to JR for these actual expenses and received a reimbursement for the business portion. How much may JR deduct as travel and transportation expense?

$9,000 Under Sec. 162(a), an employer may deduct reimbursements paid to an employee for use of his or her personal car, subject to the substantiation rules of Sec. 274. Although an employee is allowed to report to an employer either the actual expenses or a standard mileage rate for the business miles driven, the employer is allowed to deduct only what is actually reimbursed to the employee. JR reimbursed Happy $9,000 [$13,500 actual expenses × (12,000 miles ÷ 18,000 miles)]. This represented an allocation of Happy's total automobile expenses, based on the number of business miles driven as compared to the total miles driven. JR may only deduct $9,000.

Gary Judd is an individual proprietor trading as Lake Stores, an accrual basis enterprise that had been using the allowance method for determining bad debt expense for book purposes (referred to as credit loss expense on the financial statements). At December 31, 2022, Lake's allowance for doubtful accounts ("bad debt reserve") was $20,000. In Lake's 2023 budget, it was estimated that $3,000 of trade accounts receivable would become worthless in 2023. However, actual bad debts amounted to $4,000 in 2023. In Lake's 2023 Schedule C of Form 1040, Lake is allowed

A $4,000 deduction for bad debts and does not have to include any portion of the "reserve" in taxable income.

All of the following expenses incurred in the course of operating a business are deductible business expenses except A. 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. B. Advertising in a concert program the local church is sponsoring. C. Public service advertising that keeps the name of the business before the public. D. Advertising sponsorship at public school sporting events.

A. 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.

Which of the following individuals who perform services for a business are subject to taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA)? A. Sole-proprietors with employees. B. Part-time employees. C. Officers of a corporation. D. Office managers.

A. Sole-proprietors with employees.

Which of the following expenditures incurred in the operation of a business is not required to be capitalized? A. Cost of changing from one heating system to another. B. Cost of replacing small tools. C. Cost of replacing an old shingle roof with a new tile roof. D. Cost of replacing an old truck used for business delivery.

B. Cost of replacing small tools.

Clark, quarterback for the Metropolis Superheroes, Inc., football team, is also the majority shareholder. He performs no services other than playing as quarterback for the team. His salary is twice that of the next highest-paid player in the league, even though his performance is below average for a quarterback. What is the most likely treatment of his salary upon audit of the Metropolis Superheroes by the IRS?

It is deductible to the amount of the reasonable value of Clark's services.

Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings,

Juan must pay self-employment tax on the earnings of the business.