Chapter 5, 6

The amount a publicly traded corporation can deduct as compensation expense is limited to __________ (any excess is not deductible)

$1,000,000

Loan Interest - Maximum amount of deduction is

$2,500

Investment - capital loss - limited to

$3,000

T or F. Business gifts are subject to the same 50% limitation that applies to meal expenses.

False

T/F: Corbin decides rather than work late in the office, he does all of his work in an office at home. His employer approves of this arrangement. Since Corbin uses his home office on a regular and exclusive basis, he will be eligible to take a home office deduction even though it was not required as a condition of employment.

False - Home office expenses are no longer deductible for employees.

T/F: 50% of the self-employment tax is deductible as a miscellaneous itemized deduction from adjusted gross income.

False - This is a FOR AGI deduction

T/F: Ronald lives in Miami and rents his house for 12 days during the U.S. Open Tennis tournament for $4,500. He must include the rent in his income.

False - This is considered a personal residence and no reporting is required.

Ahmad is single and operates his restaurant without any partner. During the current year, Ahmad paid $3,000 for his personal health insurance plan and $5,000 for health insurance for his employees. How much of these premiums can be deducted for Ahmad's adjusted gross income?

$8,000; both employee and own health insurance premiums are deductible for AGI when it is a business.

William Broad, an insurance executive, donated $1,500,000 to his governor's re-election campaign in the hope that she will appoint him to a coveted position on the State Board of Insurance. How much of the contribution can William deduct? (a) $0 (b) $15,000 (c) $50,000 (d) $150,000 (e) None of the above

(a) $0

To be deductible, expenses must be profit-motivated (business purpose) or specifically allowed, and also (3)

1) Ordinary 2) Necessary 3) Reasonable in Amount

What is the fundamental requirement that must be satisfied to deduct a business expense?

It must have a profit motive.

Bert is engaged in the business of illegally trafficking in liquor, gambling and betting on horse races. The business is operated out of the Overflow Club. Under state law, the activities are illegal. What expenses may Bert deduct against his illegal income?

May deduct legitimate expenses incurred such as employee wages, rent, utilities

Active Investors have LT focus, interest and dividend income

NOT A TRADE/BUSINESS -> NOT DEDUCTIBLE

All expenditures fall into two categories:

Profit-motivated Personal

T/F: A necessary expense is one that is appropriate and helpful to the taxpayer's income activity.

True

T/F: Costs to influence local legislation are deductible

True

T/F: Costs to monitor any new legislation are deductible (no opinions expressed)

True

T/F: If an employer reimbursement plan is an accountable plan, for an expense that is fully reimbursed the employee does not have to report either the expense or the reimbursement.

True

T/F: To be deductible, meals must be both an ordinary and necessary business expense and must be either directly related to or associated with the active conduct of an activity for which the taxpayer has a business purpose.

True

T/F: Melissa graduated from State University last year. She had AGI of $50,000 and paid $2,350 of interest during this tax year on her qualified educational loan. The full amount is deductible.

True - Up to 2500 is deductible and phase out begins at 65,000 of AGI

What is the maximum amount a taxpayer can deduct in gifts to business customers? a) $25 b) $75 c) $100 d) $150

a) $25

Brandon uses his personal automobile in his business of selling insurances. He bought a new car in 2019 and drove it a total of 25,000 miles of which 3,000 miles were for commuting and other personal uses. Actual gas, oil, repairs, licensing, insurance, and depreciation totaled $14,200 for 2019. Actual parking expenses for business were $200. What is the maximum amount Brandon can deduct for 2019 a. $11,050 b. $12,960 c. $12,980 d. $13,600 e. $14,000

b. $12,960

Molly is single and 40 years old and is an employee of The Man Corporation. She is an active participant in the company's pension plan. Molly's adjusted gross income is $68,000 and she contributes the maximum amount allowable as a deduction to her conventional IRA account during the current year. How much can Jennifer contribute to her Roth IRA? a. $- 0 - b. $2,400 c. $3,500 d. $4,000 e. $6,000

b. $2,400

John is a janitor for XY Company and is paid $50,000 annually. The IRS deems a reasonable salary for his position to be $20,000. How much of John's salary is not allowed to be deducted by the business? a) $0 b) $20,000 c) $30,000 d) $50,000

c) $30,000

Which of the following is a requirement of a business deduction? a) It is predictable b) It bears a relationship to tangible property c) The expenditure is necessary d) All of the above are true e) None of the above are true

c) The expenditure is necessary

Petunia owns and operates a restaurant on the north side of Knoxville. She is considering opening a daycare center on the south side of town and incurs $15,800 of investigation expenses. On July 1st of the current year, Petunia opens the daycare center. How much of the investigation expenses can Petunia deduct in the current year? a. $- 0 - b. $5,000 c. $5,360 d. $7,500 e. $15,800

c. $5,360

Minerva, who owns a small accounting firm, pays $3,000 to the local country club for food and entertainment for her annual employee Holiday party. How much of the $3,000 in meals and entertainment cost can Minerva deduct? a. $- 0 - b. $500 c. $1,000 d. $1,500 e. $3,000

e. $3,000

Adjusted Gross Income (AGI) is unique to

individuals

All tax deductions are a matter of

legislative grace

Trade/ Business - "________ and ________" expenses fully deductible

ordinary; necessary

Deductions from adjusted gross income generally have a

personal purpose

Theresa, a CPA goes to Houston for 10 days. She spends 6 days visiting family and 4 days auditing clients. Which of the following expenses are deductible? Flight to Houston Lodging for 10 days Meals for 10 days Incidentals for 10 days

40% of the lodging, meals, and incidentals (preferably the actual costs spent during the 4 business days); none of the flight since not more than half of the trip time is spent for business.

Hamid owns and lives in a duplex. He rents the other unit to an unrelated married couple for $850 per month. During the current year, he incurs the following expenses related to the duplex: Mortgage interest $ 7,500 Property taxes 1,100 Utilities 1,450 Repairs Paint exterior of duplex $2,200 Fix plumbing in rental unit 320 Shampoo carpet in both units 290 Fix dishwasher in Hamid's unit 120 2,930 Homeowner's association fee 480 Insurance 800 Special property tax assessment to pave sidewalks 3,100 Depreciation (both units) 4,200 How should Hamid treat the expenditures related to the duplex? Explain.

Because the duplex is used for both a business purpose and a personal purpose, the costs must be allocated between the two units. Assuming that the two units are of equal size, 1/2 of each of the common costs are allocated to each unit. The repair to the dishwasher is not deductible because it involved Hamid's unit. The amounts expended for personal purposes are generally not deductible. However, Hamid can deduct the personal portion of the mortgage interest and property taxes as an itemized deduction. Painting the exterior of the duplex is a maintenance expense because it does not extend the useful life of the duplex. As with the other joint expenses, only the portion attributable to the duplex is deductible. The special property tax assessment is not a deductible tax and must be added to the basis of the land. Rental Income 10,200 (850 x 12) Deductions for AGI: Mortgage interest $ 3,750 Property taxes 550 Utilities 725 Paint exterior of duplex 1,100 Fix plumbing in rental unit 320 Shampoo carpet in both units 145 Homeowner's association fee 240 Insurance 400 Depreciation (both units) 2,100 (9,330) Net Rental Income 870 Itemized Deductions: Mortgage Interest 3,750 Property Tax 550

Why must a conduit entity report certain deductions separately?

Certain items from a conduit entity (charitable contributions, capital gains and losses) will be subject to different limitations depending on the owner's particular situation. Therefore, many items must be reported separately.

Why does the computation of adjusted gross income apply only to individual taxpayers and not to other tax entities such as corporations?

Corporations don't have personal expenses. AGI separates business and other allowable expenses from the "from" deductions which are primarily personal.

Active Traders have ST focus, ST gains income

Deductible FOR AGI

Securities Dealers sell to customers for commissions

Deductible FOR AGI

Evelyn is single and a self-employed engineer. During 2015, Evelyn's income from her engineering business is $55,000. Evelyn pays $3,100 for her medical insurance policy. How should the medical insurance policy payment be reflected on Evelyn's 2015 tax return?

Evelyn is allowed a deduction for adjusted gross income for the cost of the policy.

Sarah, an employee of ABC Corp travels for business and reports $1,000 in expenses (lodging, transportation, meals) related to the business trip. ABC has an accountable plan and reimburses Sarah $900

Sarah does not report the $900 in income or expenses, but she can report $100 as a misc itemized deduction subject to limitations

Claudia's medical clinic sets up a tent at a local charity 5k and provides free medical services and healthy snacks, as well as music and contests throughout the day. Can she deduct the expenses as a business expense?

This falls under one of the exceptions that allows "expenses for goods, services, and facilities made available to the general public" to be fully deductible.

At Christmas, Zenith Consulting sends out cases of beer costing $75 each to its best 20 customers. How much can the business deduct for this expense?

This is considered a business gift Business gifts are limited to $25 per donee, so Zenith would be able to deduct $25 x 20 = $500

Rubin Corporation provides the food, beverages, and entertainment for a Fourth of July picnic for its employees and their families. This is an annual event that Rubin believes benefits its employees and the company. How much of the costs related to this are deductible?

This is fully deductible and not subject to the 50% limitation because the expense is for the recreational and social benefit of its employees.

Contributions into which of the following is deductible? a) Conventional IRA b) Roth IRA c) Education IRA

a) Conventional IRA

Suzanne goes on a business trip for her employer. She incurs costs of $200 airfare, $567 lodging, $240 in food, and $1000 for the conference. Her company has an accountable reimbursement plan. a. How much can Suzanne deduct if she is reimbursed the full amount? b. How much can Suzanne deduct if she is not reimbursed at all? c. How much can the business deduct, assuming they fully reimburse Suzanne?

a. $0 (she doesn't have any expenses as she was reimbursed, so she wouldn't be able to deduct anything) b. $0; under the new tax law, no deductions are allowed for unreimbursed employee expenses c. The company can deduct the full amount of the airfare, lodging, and conference fees, and 50% of her meals. The amounts to 200 + 567 + 1,000 + (50% x 240) = 1,887

At Christmas, Zenith Consulting sends out cases of beer costing $75 each to its best 10 customers. How much can the business deduct for this expense? a. $250 b. $25 c. $500 d. $1,000 e. $375

a. $250

Deductions for adjusted gross income generally have a

business purpose

Two major Retirement IRA types:

conventional Roth

a ________ expense are always classified as trade or business expenses

corporation's

Cass decides to use the Actual Cost Method to maximize her Auto Deduction. She drove 20,000 miles for business purposes and 4,000 miles for personal use. She also had the following expenses: Tolls: $ 60 (75% related to Business) Depreciation, gas, repairs: $ 1,200 Car Wash: $ 100 Interest: $ 500 What is her deduction using the Actual Cost Method? a) $ 1,471 b) $ 1,556 c) $ 11,300 d) $ 1,456 e) $ 0

d) $ 1,456 Actual Operation Expense: $1,200 Business Use Percentage (20,000/24,000): 83% Business Portion of Operation Expense: $996 Tolls ($60 x 75%): $45 Interest ($500 x 83%): $415 Total Deduction: $1,456

Growers, LLC and 100% owned LLC reported on Gary's 1040 as a sole proprietorship has the following items of income and costs: Sales $600,000 Payment to lobbyist in Washington DC to influence Congress $ 10,000 Meals and entertainment $ 30,000 Travel documented with receipts $120,000 Charitable contributions to the United Way $ 25,000 Other deductible operating costs $400,000 What is the business income or loss? a) $15,000 b) $30,000 c) $40,000 d) $65,000 e) None of the above

d) $65,000

Cynthia operates an illegal gambling enterprise out of her retail warehouse. Considering only the following expenses, what amount can she deduct? Building rent $49,000 Secretarial services 13,000 Payments to security guards 25,000 Bribes to health inspectors 20,000 ​ a. $- 0 - b. $49,000 c. $62,000 d. $87,000 e. $107,000

d. $87,000

Which of the following best describes the tax treatment of losses from uncollectible business debts? a. Such losses are not deductible. b. Such losses are limited to $3,000 per year. c. Such losses are treated as short-term capital losses. d. Such losses are deductible without limitation as an ordinary loss.

d. Such losses are deductible without limitation as an ordinary loss.

Legal fees are deductible if they were paid to

defend business income, reputation, or goodwill

Businesses do not have (for/from) deductions

from

Sawsan is a 51 year old who is married to Lavender who is 48 years old. They have AGI of $106,000 this year. They have a conventional IRA and both are covered by an employer sponsored plan. How much is their maximum allowable deduction if they each contribute the maximum to their conventional IRAs? a. $1,100 b. $1,250 c. $1,950 d. $7,500 e. $12,200 f. $12,500 g. $11,050 h. $12,000 i. $13,000

g. $11,050

Business expenses include: I. expenditures that have a business purpose II. expenditures that are incurred for the production of income. a) Only statement I is correct. b) Only statement II is correct. c) Both statements are correct. d) Neither statement is correct.

c) Both statements are correct.

An individual has an income of $90,000. He is 47 years old and contributes $1,000 annually to a Roth IRA. He would like to set up a CESA for his son. What is the maximum he can contribute? a) $0 b) $1,000 c) $2,000 d) $3,000

c) $2,000

Mr. Anderson, a football coach, is sent on a recruiting trip to Jacksonville, FL for 7 days. His plane ticket costs $250, meals cost $50/day, and had incidental costs of $50/day. While he is in Jacksonville, he decides to spend 4 days visiting with his brother who lives in Jacksonville, and spends the remaining 3 days visiting recruits. How much of Mr. Anderson's trip is deductible? a) $300 b) $475 c) $225 d) $550

c) $225 Mr. Anderson is not allowed to deduct the cost of travel since more than 50% of his time in Jacksonville was spent visiting family. He is allowed to deduct half of his meal costs for the 3 days he spent visiting recruits, and the entire cost of his incidental expenses for the 3 days spent doing work 1/2($50 x 3) + ($50 x 3) = $225

An ordinary expense I. is normal, common, and accepted under the circumstances of the business community. II. is an expense commonly incurred in an income-producing activity. a) Only statement I is correct. b) Only statement II is correct. c) Both statements are correct. d) Neither statement is correct.

c) Both statements are correct.

Sheila extensively buys and sells securities. The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore, Shelia must be: a) a broker. b) an active trader. c) an active investor. d) a securities' dealer.

c) an active investor.

To be deductible, the dominant motive for incurring an expense must be a) the relationship to a business activity. b) to reduce income taxes. c) tax avoidance. d) the intent to earn a profit. e) personal.

d) the intent to earn a profit.

Bruce operates an illegal drug business. Which of the following is deductible? a. Commissions paid to dealers. b. Rent for a warehouse. c. Bribes paid to local police. d. Cost of drugs sold. e. Interest on debt to finance the purchase of inventory.

d. Cost of drugs sold.

Insurance premiums paid to protect a business from certain losses are ________

deductible

For the past 7 tax years, Robert Zimmerman, an accountant, played music in local bars in his spare time. Two of the years 3 and 4 years ago were the only years that his income exceeded their expenses. Which of the following statements are true: (a) The activity is a business, the IRS cannot prove it is a hobby (b) The activity is a hobby, Robert cannot prove that it is a business. (c) The activity is presumed to be a business, however the IRS may prove it is a hobby. (d) The activity is presumed to be a hobby, however Robert may prove it is a business. (e) None of the above are true

(d) The activity is presumed to be a hobby, however Robert may prove it is a business.

Alvin is an employee of York Company. During the year, he incurs the following employment-related expenses: Travel $ 4,000 Meals 3,500 Lodging 2,500 a. How should Alvin treat these expenses if York Company has an accountable employee business expense reimbursement plan and Alvin is reimbursed 1) $ 9,000? 2) $ 10,000? 3) $ 11,000? b. How would your answer to part a change if Alvin were self-employed (i.e., receiving no reimbursements)?

1) Alvin is in a net deduction situation. The $9,000 is included in gross income and Alvin is allowed a deduction for adjusted gross income (AGI) for the $9,000 of reimbursed expenses. (HE SHOULD NOT REPORT THE 9,000 INCOME OR EXPENSES ON HIS TAX RETURN). The remaining $1,000 of expenses are not deductible. 2) Because the plan is accountable and the reimbursement equals actual expenses, no gross income is reported and no deductions are taken. 3) The 10,000 is treated under the accountable plan and nothing is reported. The 1,000 (assuming he does not repay it) is treated as being under a non-accountable plan and he includes the 1,000 in gross income. b. If Alvin is self-employed, the expenses are considered to be trade or business expenses and therefore, deductible FOR AGI. However, the meal limitation still applies and Alvin's deduction will be $8,250 as calculated below. Travel: $4,000 Meals (50%): $1,750 Lodging: $2,500 Total: $8,250

Five Negative Tests for Deductibility (to be deductible, expenses must not be:)

1) Personal 2) Capital Expenditures 3) Against Public Policy (violation of a law, illegal) 4) Related to Tax-Exempt Income 5) Another Person's Obligation

Trade or business: Requirements to qualify:

1) Primary purpose is to earn income or a profit 2) Involvement is regular and continuous 3) Activity is not merely a hobby

Sharon is single and a data-processing manager for the phone company. She also owns and operates a sports memorabilia store. Sharon goes to shows, subscribes to numerous magazines on sports memorabilia, and maintains a Web page on the Internet. She has been engaged in the activity for the last 5 years. During that time, she reported a net loss in two of the years and net income in the other three. Overall, her sports memorabilia activity has shown a slight loss, but the value of her collection over the 5 years has increased by 20%. Sharon rents a 600-square-foot storefront for $500 a month. Although the store is open only on Saturdays, she is usually in her office at the store 2 or 3 nights a week buying and selling sports memorabilia over the Internet. For the current year, she has an adjusted gross income of $42,000 before considering the following income and expenses related to her sports memorabilia activity: Sale of memorabilia $11,500 Cost of items sold 3,725 Cost of new memorabilia acquired 1,500 Registration and booth fees 750 Transportation to memorabilia shows 600 Meals attending shows 250 Cost of magazines 280 Cost of Internet connection 240 Office utilities 800 Phone 400 Depreciation on computer 200 a) What is the proper tax treatment of these items if Sharon is engaged in a trade or business? b) What is the proper tax treatment of these items if she is engaged in a hobby? c) What factors (e.g., facts, aspects) of Sharon's sports memorabilia activity indicate that it is a hobby? a trade or business?

COGS - 3,725 Registration - 750 Transportation - 600 Meals - 125 (50%) Magazines - 280 Internet - 240 Utilities - 800 Phone - 400 Depreciation - 200 Rent - 6,000 (500 x 12) Expense: 13,120 Revenues: 11,500 a) Sharon will be able to reduce ordinary income by 1,620 (she can use the loss to reduce taxable income) Revenues: 11,500 Expenses: (13,120) Loss: (1,620) b) Sharon is not able to deduct any expenses. Her gross income will increase by 7,775 Revenues: 11,500 COGS: (3,725) Income: 7,775 c) Trade/Business: Sharon conducts in a business-like manner (renting space, additional utilities, etc.), she has professional expertise in related activities Hobby: Sharon has a full time job already in another industry; if we looked at her financial position, does she just rely on this business to supplement income? If not, it is likely a hobby

T/F: For a taxpayer to be engaged in a trade or business, the activity must meet all of the following tests: it must produce a profit every year; must be continuous and regular activity; and must be the taxpayer's livelihood not their hobby.

False - It does not need to produce a profit every year to be considered a trade or business

T/F: Nancy owns the building where her plumbing supply business is located. This year she put on vinyl siding to replace (not repair) the weathered wood siding on her building. The cost of the new siding can be expensed in the current year.

False - This is a capital expenditure and it must be depreciated.

During the current year, Covino Construction makes $5,000 in political contributions to ten political candidates. What amount can Covino deduct for financial accounting purposes? for tax purposes?

For financial accounting purposes, Covino can deduct the $50,000 ($5,000 x 10) in political contributions as a business expense. However, for tax purposes the political contributions are not deductible. The expense is not ordinary and necessary to the taxpayer's trade or business. In upholding the denial of a deduction for political contributions, the courts have maintained that the money has an "insidious influence" on politics and that the tax system should not promote expenditures that encourage the frustration of public policy.

Kai, a cash basis taxpayer, is a 75% owner and president of Finnigan Fish Market. Finnigan, an S corporation, uses the accrual method of accounting. On December 28, of the current tax year, Finnigan accrues a bonus of $40,000 to Kai. The bonus is payable on February 1, of the following tax year. When is the bonus deductible? How would your answer change if Finnigan is a cash basis taxpayer?

Generally, an accrual basis corporation can deduct an expense in the tax year in which the payment is made to a cash basis taxpayer. However, because Kai and Finnigan are related parties, Finnigan must wait to deduct the expense until the next tax year, the tax year Kai reports the bonus as income. Finnigan can deduct the expense on its tax return for the year ended December 31, of the next tax year and Kai will report the bonus as income on his next year tax return. Note that the effect of the related party rule is to always have the income and the corresponding deduction reported in the same year. If both Kai and Finnigan are cash basis taxpayers, then Finnigan will deduct the bonus when it is paid in the next tax year and Kai will report the bonus as income in the next tax year.

Sam owns a small apartment building (this is the only rental building Sam owns). During the year Sam incurs the following expenditures: Replace roof and roof underlying structure because of building code requirements $80,000 Repaint the exterior 9,000 Repair door handles and locks 1,000 Replace broken windows 1,500 Replace crumbling sidewalks and stairs because of building code requirements 47,000 Discuss the proper tax treatment for each of these expenditures.

Replacement of roof - capitalize and depreciate. Repainting of exterior - deduct as an expense. Installation of locks - deduct as an expense. Replacement of broken windows - deduct as an expense. Replacement of crumbling sidewalks and stairs - capitalize and depreciate. Note that the Treasury has recently issued new regulations that have very detailed instructions and examples regarding how to determine whether an expenditure is to be capitalized or deducted.

Lee and Sally own a winter retreat in Harlingen, Texas, that qualifies as their second home. This year they spent 40 days in their cabin. Because of its ideal location, it is easy to rent at $120 a day and was rented for 80 days this year. The total upkeep costs of the cabin for the year were as follows: Mortgage interest $ 9,000 Real and personal property taxes 1,200 Insurance 750 Utilities 600 Repairs and maintenance 1,000 Depreciation 2,500 What is the proper treatment of this information on Lee and Sally's tax return?

Report $0 on 1040 with a depreciation carryover of 434 Vacation Home Rules: Rented < 14 days (personal) Personal Use > 14 days or > 10% of total days (vacation) Personal Use < 14 days or < 10% of total days (rental) 1. Determine classification - Vacation (since this classified as vacation, deductions are limited to rental income) Personal: 40 days Rental: 80 days 40/80 = 50% (personal use is greater than 10%) Rental Income: $120 x 80 days = $9,600 2. Calculate allocation for rental portion Rental % = 80 / 40+80 = 66.7% Mortgage interest 6,000 Real and personal property taxes 800 Insurance 500 Utilities 400 Repairs and maintenance 667 Depreciation 1,667 3. Order of expenses deducted a) Interest 6,000 Taxes 800 Total: 6,800 (we can keep going until we reach the rental income) b) Insurance 500 Utilities 400 Repairs 667 Total: 1,567 (currently at 8,367; total remaining from rental income is 1,233) c) Depreciation 1,233 (the remaining depreciation can be carried over, 434)

Sarah, an employee of ABC Corp travels for business and reports $1,000 in expenses (lodging, transportation, meals) related to the business trip. ABC has an accountable plan and reimburses Sarah $1,100 ahead of time, and she does not pays back the $100.

Sarah reports $100 as income. The $1,000 is not reported.

Sarah, an employee of ABC Corp travels for business and reports $1,000 in expenses (lodging, transportation, meals) related to the business trip. ABC has an accountable plan and reimburses Sarah $1,000

Sarah reports nothing related to this trip on her tax return.

Nicole is a graduate student who incurred $150,000 in student loans from which she started making payments. Her total student loan interest paid was $3,500 for the year. She has total gross income of $72,500. How much of the student loan interest paid can Nicole deduct for AGI?

Student loan interest paid deduction phases out at $70,000 - $85,000 (Single) and the maximum amount allowable for deduction is $2,500. Deduction: (72,500 - 70,000) / 15,000 = 0.167% (1 - 0.167%) x 2,500 = 2,083.33 (for AGI deduction)

Max owns an office building that he rents for $750 a month. Under the terms of the lease, the tenant is responsible for paying all property taxes and costs related to the building's operation and maintenance. The only cost to Max in relation to the lease is an annual legal fee for renewing the lease. Is Max engaged in the trade or business of renting real estate? How would you classify his deduction for the attorney's fee?

The IRS historically viewed the rental of a single piece of improved real estate as a trade or business. If the IRS continues this position, the attorney fees are a deductible business expense (expenses related to earning rental income are deductible for adjusted gross income).

Ray, 83, is a used car dealer. He lives in a rural community and operates the business out of his home. One room in his 6-room house is used exclusively for his business office. He parks the cars in his front yard, and when customers come along, they sit on the front porch and negotiate a sale price. The income statement for Ray's auto business is as follows: Sales $110,000 Cost of cars sold 78,000 Gross profit $ 32,000 Interest expense on cars $ 4,200 Property tax on cars 700 Gas, oil, repairs 1,200 Loan fees 3,200 Depreciation on equipment 1,800 (11,100) Net profit $ 20,900 If Ray's home were rental property, the annual depreciation would be $2,900. The utilities and upkeep on the home cost Ray $6,400 for the year. Ray's mortgage interest for the year is $2,400. When asked about the loan fees, Ray bitterly responds that Jim, the bank loan officer, charges him 10% of his gross profit on cars financed through the bank. Ray says, "The money is under the table, and if I don't shell out the cash, Jim won't loan the money to my customers to buy my cars. Everybody goes to Jim — he's got the cash." Write a letter to Ray explaining the proper tax treatment of this information on his tax return.

The loan fees ($3,200) are not deductible as an ordinary expense related to selling used cars. They are an illegal kickback. Since 1/6 of the home is used for business the following expenses are allowed as a home office deduction: Utilities $ 6,400 x 1/6 = $ 1,067 Interest $ 2,400 x 1/6 = 400 Depreciation $ 2,900 x 1/6 = 483 Total $ 1,950* The interest expense related to personal use of the home is an itemized deduction $2,400 x (5 ÷ 6) = $2,000 Sales $110,000 Cost of cars sold 78,000 Gross profit $ 32,000 Interest expense on cars $ 4,200 Property tax on cars 700 Gas, oil, repairs 1,200 Loan fees 0 Depreciation on equipment 1,800 Business Use of Home 1,950* (9,850) Net profit $ 22,150

T/F: Robert, a banker, is an amateur photographer who takes pictures at weddings and parties. He earned $2,000 but incurred $2,200 in related expenses. Since he takes a standard deduction, he will have to include the $2,000 in income but will not get any benefit from the expenses.

True

T/F: The actual cost method is a more-flexible way to compute the auto expense deduction and often results in a larger tax savings.

True

Ying pays an adviser $300 to help manage her investments and provide investment advice. The adviser's fee is not directly related to any particular investment owned by Ying. She owns $40,000 worth of municipal bonds that pay her $2,400 in interest and $20,000 worth of bonds that pay her taxable interest of $2,000. What is the proper tax treatment of the $300 fee for investment advice?

Ying would use option 2 (based on FMV of interest) as the deduction is larger *NOTE taxpayer must choose one method and remain consistent each year Portion of the $300 involved with the taxable interest will be deductible; the remaining portion related to the tax exempt interest will not be deductible Options: 1) Based on FMV of the securities - Total Value of Securities: $20,000 + $40,000 = $60,000 Taxable: $300(20,000/60,000) = $100 (deduction allowed under this method) 2) Based on the FMV of the interest - Total Value of Interest: $2,400 + $2,000 = $4,400 Taxable: $300(2,000/4,400) = $136 (deduction allowed under this method)

Jay-z and Beyonce just got back from their business weekend excursion in Miami. They incurred the following expenses. What is the total amount that is deductible for tax purposes? 2 round trip first class airline tickets $2,200 3 nights at 5 star hotel $5,100 Jay-Z took clients to dinner and to a Heat game to discuss their new contract ($600 for dinner, $1,200 for the game) $1,800 Beyonce buys a Gucci purse for her to wear before her next performance $900 a) $7,600 b) $10,000 c) $8,200 d) $9,100

a) $7,600 They are allowed to deduct 50% of the dinner (300 of the 600). Because the purse is not necessary for Beyonce's performance this is a personal expense and is not deductible. Entertainment expenses are no longer deductible, so they are unable to deduct any of the Heat tickets

Hromas uses a separate room in his home as an office. The room is 500 square feet of the total 2,000 square feet of the house. During the current year, Hromas incurs the following household expenses: Mortgage interest $ 12,000 Property taxes 1,400 Insurance 450 Utilities Gas and electric $ 2,100 Cable television 280 Phone ($15 per month for a separate phone number for the office) 450 2,830 House cleaning 1,820 Long-distance phone calls (business-related) 670 Depreciation (unallocated) 5,600 How much of a deduction is Hromas allowed for the cost of the home office in each of the following situations? a) Hromas is an independent salesperson who uses the room exclusively to call customers who buy goods from him. During the current year, his sales total $83,000, cost of goods sold is $33,000 and he incurs other valid business expenses unrelated to the office of $25,000. b) Hromas is an employee of Ace Computer Company. He uses the office primarily when he brings work home at nights and on weekends. He occasionally uses the office to pay personal bills and to study the stock market so he can make personal investments. His salary at Ace is $80,000 per year. He is not paid extra for the time he spends working at home.

a) Because Hromas uses the office exclusively and on a regular basis as a principal place of business, he is allowed to deduct the costs associated with the home office. However, the home office deduction cannot exceed his income from the trade or business less the costs unrelated to the office. In addition to the $25,000 of expenses unrelated to his office, he can deduct $180 for the extra phone line and the long distance phone calls of $670 as business expenses. Therefore, he is limited to a maximum home office deduction of $24,150 ($83,000 - $33,000 - $25,000 - $180 - $670). The costs of the home office must be allocated on some reasonable basis. The square footage of the office is 25% (500 ÷ 2,000) of the total square footage and provides a reasonable basis to allocate expenses that are related to the house. The cost of the cable TV is not deductible. In addition, only the $15 per month cost of the office phone number is deductible. The long-distance business calls do not have to be allocated. Interest ($12,000 x 25%) $ 3,000 Property taxes ($1,400 x 25%) 350 Insurance ($450 x 25%) 113 Gas & electric ($2,100 x 25%) 525 Cable TV -0- House cleaning ($1,820 x 25%) 455 Depreciation ($5,600 x 25%) 1,400 Total home office costs $ 5,843 b) For an employee to deduct the cost of a home office, the exclusive and regular use tests must be met. In addition, the office must be for the convenience of the employer and required as a condition of employment. In this case, Hromas does not meet the exclusive use test (office work and personal work done in the office). In addition, the office is clearly for his convenience, not the employers, and there is no indication that Hromas must maintain the office in order to retain his job. Therefore, no deduction is allowed for the home office. He would be able to deduct all of the mortgage interest and property taxes as itemized deductions. Furthermore, even if all of the conditions listed above were satisfied, the Tax Cuts and Jobs Act suspends the deduction for employee business expenses paid or incurred after December 31, 2017.

As a hobby, Jane creates and sells oil paintings. During the current year, her sales total $8,000. How is the tax treatment of her hobby different from the treatment of a trade or business, if a) Her business expenses total $5,600? b) Her business expenses total $10,000? c) Assume that Jane itemizes her deductions and that she has an adjusted gross income of $42,000 before considering the effect of the hobby. Discuss the actual amount of the deduction Jane would receive in parts a and b.

a) Because Jane's activity is a hobby, her sales must be reported as gross income and her expenses are not deductible. Gross Income is 8,000 b) (same as a) c) Under the TC&JA, Hobby expenses are not deductible, so Jane will not receive a deduction.

Wilson owns a condominium in Gatlinburg, Tennessee. During the current year, he incurs the following expenses before allocation related to the property: Mortgage interest $10,000 Property taxes 4,000 Utilities 1,000 Maintenance fees 1,300 Repairs 800 Depreciation 6,000 a) For each of the following scenarios indicate whether Wilson would treat the condominium for income tax purposes as personal use property, a rental or a vacation home. Rental Income; Rental Days; Personal Use Days A) $10,000; 300; 0 B) 7,000; 60; 10 C) 15,000; 60; 20 D) 2,000; 10; 40 E) 11,000; 280; 20 b) Consider Case C above. Determine Wilson's deductions related to the condominium. Indicate the amount of each expense that can be deducted and how it would be deducted.

a) Case A: Rental Case B: Rental Case C: Vacation Case D: Personal Case E: Rental b) Wilson can deduct $15,000 in allocated rental expenses, enough to offset the $15,000 of income. If Wilson itemizes, he can deduct $2,500 of mortgage interest and $1,000 of property taxes. In addition, the $2,325 ($4,500 - $2,175) of depreciation not deducted in the current year can be carried forward to offset rental income in future years 1. Determine classification - Vacation (since this classified as vacation, deductions are limited to rental income) Personal: 20 days Rental: 60 days Rental Income: $15,000 2. Calculate allocation for rental portion Rental % = 60 / 60+20 = 75% Mortgage interest $ 7,500 Property taxes 3,000 Utilities 750 Maintenance Fees 975 Repairs 600 Depreciation 4,500 3. Order of expenses deducted a) Interest 7,500 Taxes 3,000 Total: 10,500 (we can keep going until we reach the rental income) b) Utilities 750 Maintenance Fees 975 Repairs 600 Total: 2,325 (currently at 12,825; we can keep going until we reach the rental income) c) Depreciation 2,175 (rental income has been reached, 2,325 in depreciation will need to be carried forward to the next year)

All of the following are required test for the deduction of a business expense except? a) GAAP approved. b) Ordinary. c) Necessary. d) Business purpose. e) Reasonable in amount.

a) GAAP approved.

For each of the following situations, explain whether a deduction should be allowed for entertainment expenses: a. Neil owns a real estate agency and has an annual Christmas party at his house. The party is only for employees of his firm and costs $2,600. b. Carol is a personal financial planner. Over the years, she has made it a practice to invite her best clients to lunch on the client's birthday. At the lunch, she always makes it a point to ask about any major changes in the client's financial status that she should be aware of. However, most of the conversation relates to personal matters. During the year, Carol spent $850 on these lunches. c. Vijay is a doctor at a local hospital. Every month, he buys lunch at the hospital for the six residents and interns who assist him in surgery and caring for his patients. The lunches cost $420 for the year. d. Tom, Hillary, and George are friends from college who live and work in the Dallas metropolitan area. They are all stockbrokers for different firms and get together twice a month for lunch to exchange rumors concerning the stock market. In addition, they catch up on personal news and make plans to get together with their spouses and other friends. Last year, George made $50,000 for a client based on a tip he received from Hillary at one of their meetings. Each stockbroker pays for his or her own lunch, and during the year, George paid $320.

a. The cost of the Christmas party is fully deductible. Employee recreational expenses, such as a Christmas party, are not subject to the 50% limitation on meals and entertainment. b. A meal expense is related to the active conduct of the taxpayer's business if it meets all four of the following conditions:1. There is more than a general expectation of deriving income or a business benefit from the meal2. A bona fide business activity takes place during the meal.3. The principal reason for providing the meal is to conduct business, and4. The expenses are related to the taxpayer and people involved in the business activity The key test that Carol must meet for the meal to be deductible under the related test is that the principal reason for providing the meal must be to conduct business. Because Carol entertains the client on their birthday and the majority of the conversion is not business related, it appears that she does not meet this test. Therefore, the $850 spent for the lunches is not deductible. c. Vijay may not deduct the $420. Because Vijay is not required as part of his job to pay for these lunches and the lunches are not directly related to or associated with his job as a doctor, the lunches are not considered ordinary and necessary expenses of his job. The expenses related to these meals are nondeductible personal expenses d. George may not deduct any of the expense for the meals. The expense is allowed as a deduction only if George can show a business purpose for the expense and it qualifies as directly related to or associated with his job as a stockbroker. In George's case, the meals appear to be primarily based on personal motives and not directly related to or associated with the active conduct of her business.

Deductions are part of Congress' approach to implementation of

ability-to-pay

Mel and Helen own a beachfront home in Myrtle Beach, S.C. During the year, they rented the house for 5 weeks (35 days) at $800 per week and used the house for personal purposes 65 days. The costs of maintaining the house for the year were Mortgage interest $ 5,500 Real property taxes 4,500 Insurance 650 Utilities 1,000 Repairs and maintenance 480 Depreciation (unallocated) 3,500 a) What is the proper tax treatment of this information on their tax return? b) What is the proper tax treatment if Helen and Mel rented the house for only 2 weeks (14 days)?

a) Report $0 on 1040 with a depreciation carryover of 1,225 and operating expenses carryover of 246. Vacation Home Rules: Rented < 14 days (personal) Personal Use > 14 days or > 10% of total days (vacation) Personal Use < 14 days or < 10% of total days (rental) 1. Determine classification - Vacation (since this classified as vacation, deductions are limited to rental income) Personal: 65 days Rental: 35 days Rental Income: $800 x 5 weeks = $4,000 2. Calculate allocation for rental portion Rental % = 35 / 65+35 = 35% Mortgage interest $ 1,925 Real property taxes 1,575 Insurance 228 Utilities 350 Repairs and maintenance 168 Depreciation (unallocated) 1,225 3. Order of expenses deducted a) Interest 1,925 Taxes 1,575 Total: 3,500 (we can keep going until we reach the rental income) b) Insurance 228 Utilities 350 Repairs 167 Total: 746 (currently at 4,246; since we can only go up to the rental income, $246 will need to be carried forward to the next year) c) Depreciation 1,225 (rental income has been reached, depreciation will need to be carried forward to the next year) b) If the dwelling is rented 14 days or less, the $1,600 of rental income ($800 x 2 weeks) is not reported and expenses related to rental use are not deducted. The interest and taxes ($10,000) are allowed as an itemized deduction.

Juanita travels to San Francisco for 7 days. The following facts are related to the trip: Round trip airfare $ 475 Hotel daily rate for single or double occupancy 175 Meals -- $40 per day 40 Incidentals -- $25 per day 25 a. If she spends 4 days on business and 3 days sightseeing, what amount may she deduct as travel expense? b. If she spends 2 days on business and 5 days sightseeing, what amount may she deduct as travel expense? c. Assume the same facts as in part a, except that Juanita's husband Jorge accompanied her on the trip and the hotel's single occupancy rate is $150 (and double is 175). Jorge went sightseeing every day and attended business receptions with Juanita at night. Assume that Jorge's expenses are identical to Juanita's. What amount may Juanita and Jorge deduct as travel expense?

a. Based on time spent on business and personal activities, the trip was primarily for business. As a result, transportation is fully deductible. Other expenses are deducted as follows: Airfare $ 475 Hotel ($175 x 4) 700 Meals ($40 x 4 x 50%) 80 Incidentals ($25 x 4) 100 Total deduction $ 1,355 b. Based on the time spent on business and personal activities, the trip was primarily for personal reasons (i.e., fewer days spent on business than on personal). As a result, none of the transportation is deductible. Other expenses are allowed for business days as follows: Airfare $ -0- Hotel ($175 x 2) 350 Meals ($40 x 2 x 50%) 40 Incidentals ($25 x 2) 50 Total deduction $ 440 Only expenses related to the 2 days devoted to business can be deducted. Meals are further limited to 50% of the deductible amount. c. None of Jorge's expenses are allowed as a business deduction unless there is a substantial business purpose for his presence and he is an employee of Juanita's business. Because Jorge fails both of these requirements, none of his expenses are deductible. Because the hotel rate is the greater for a double occupancy than for a single, Juanita can only deduct $150 per night for lodging. The $25 difference is considered a personal expense and allocated to Jorge. Juanita can deduct the following amount: Airfare $ 475 Hotel ($150 x 4) 600 Meals ($40 x 4 x 50%) 80 Incidentals ($25 x 4) 100 Total deduction $ 1,255

Carlos and Angela are married, file a joint return, and both are 42 years old. During the current year, Carlos's salary is $70,000. Neither Carlos nor Angela is covered by an employer-sponsored pension plan. Determine the maximum IRA contribution and deduction amounts in each of the following cases: a. Angela earns $28,000, and their adjusted gross income is $109,000. b. Angela does not work outside the home, and their adjusted gross income is $75,000. c. Assume the same facts as in part a, except that Carlos is 52, Angela is 48 and both are covered by an employer-sponsored pension plan. d. Assume the same facts as in part a, except that Carlos is covered by an employer-sponsored pension plan.

a. Both taxpayers have earned income. Because neither Carlos nor Angela is covered by a pension plan, they each can contribute and deduct up to $6,000. Thus, they may contribute and deduct a total of $12,000 for adjusted gross income. b. Even though Angela does not have earned income, they are allowed to contribute and deduct a maximum of $12,000 for adjusted gross income because their total earned income exceeds $11,000. However, they must establish separate IRA accounts and the total amount contributed to each account cannot exceed $12,000. c. Angela is allowed to contribute $6,000 to her IRA. Because Carlos is at least 50 years of age, he is allowed to contribute $7,000 to an IRA account. Because both are covered by an employer-sponsored pension plan, the amount of the IRA deduction is reduced when their adjusted gross income reaches $$103,000. The deduction is fully phased out when adjusted gross income exceeds $123,000. The maximum contribution amount is not affected by this limitation, only the deductible amount of the contribution. Angela's $6,000 deduction must be reduced by 30% [($109,000 - $103,000) ÷ $20,000] and leaves her with an allowable deduction for adjusted gross income of $4,200 [$6,000 - ($6,000 x 30%)]. Carlos's $7,000 deduction is also reduced by 30% [($109,000 - $103,000) ÷ $20,000] and leaves him with an allowable deduction for adjusted gross income of $4,900 [$7,000 - ($7,000 x 30%)]. Their total deduction for AGI is $9,100 ($4,200 + $4,900). d. Because Carlos is covered by an employer-sponsored pension plan, the amount of his IRA deduction is reduced because their adjusted gross income exceeds the $103,000 phase-out level. Therefore, he may contribute $6,000 but the amount he can deduct must be reduced by 30% [($109,000 - $103,000) ÷ $20,000]. This leaves an allowable deduction for adjusted gross income of $4,200 [$6,000 - ($6,000 x 30%)]. Because Angela is not covered by an employer-sponsored pension plan, and their total adjusted gross income does not exceed $193,000, she may contribute $6,000 and deduct the entire contribution for adjusted gross income. Therefore, their maximum contribution is $12,000 and their maximum deduction is $10,200. Note: Carlos's deductible contribution will be fully phased-out when their AGI exceeds $123,000. When their AGI exceeds $193,000, Angela's deductible contribution would begin to be phased-out and would be fully phased-out when AGI exceeds $203,000.

Pedro owns 5 rental properties. He contracts with East Lake Properties, Inc., to manage the real estate. East Lake obtains tenants, negotiates leases, makes necessary repairs, pays expenses related to the properties, and remits monthly net receipts to Pedro. I. Pedro's sale of the properties at a gain will result in a capital gain. II. Pedro's sale of the properties at a loss results in an ordinary loss on his tax return. ​ a. Only statement I is correct. b. Only statement II is correct. c. Both statements are correct. d. Neither statement is correct.

a. Only statement I is correct.

Pablo is a self-employed computer sales representative and spends only 4 days a month in the office. His office is 18 miles from home. Pablo spends 3 nights a month traveling to his out-of-town clients. a. What portion of Pablo's travel is considered business? b. During the year, Pablo keeps the following record of his travel: Miles Home to office 864 Office to home 864 Home to local clients to home 10,630 Home to out of town clients to home 2,650 If he uses the standard mileage rate, what amount can he deduct as a business expense?

a. Out of town business travel and home/office to clients is business travel. Commuting is never deductible. b. The standard mileage rate is $0.58/mile. Business miles = 10630 + 2650 = 13,280 13,280 x .58 = 7702 as a FOR AGI deduction

Sally and Bob are married and each have an income. Sally is 42 and makes $20,000 per year. Bob is 55 and makes $15,000 per year. a. Their AGI is $35,000. What is the total maximum they can contribute to their individual retirement accounts? b. Sally and Bob are married and work and have an employer sponsored pension plan. Bob is 55 and makes $20,000 per year. Sally is 49 and makes $15,000 per year. Their AGI is $112,000. What is their maximum IRA deduction?

a. Sally max = 6,000 Bob max = 7,000 (over age 50) Total = 13,000 b. 13,000 max (from Part A) AGI Phase Out Range (from table) = 103,000 - 123,000 Calculation of Phase Out: (112,000 - 103,000) / (123,000 - 103,000) 9,000 / 20,000 = 45 % phased out Max allowed x (1- phase out percent) 13,000 x (1 - 0.45) $7,150 is the maximum deduction

Chris accepts a position on the West Coast after graduation. After accepting, he travels to LA to apartment hunt, incurring $400 of expenses. He pays his friend in 3 cases of Bud Light (retail value = $60) to take care of his dog. When he moves, he incurs $1,250 of moving expenses (costs for moving truck, gas, hotel), and settles in. How much of these expenses can Chris deduct? a) $1,710 b) $0 c) $1,310 d) $1,250

b) $0 (With the Tax Cuts and Jobs Act, Moving expenses are only deductible for members of the military with orders to move)

Joe is the owner of an entertainment store. To show his appreciation towards his best customers, he would like give them a gift of new Dr. Dre Beats headphones. He gives 10 customers headphones worth $300 each. What is the maximum amount Joe can deduct for these gifts for tax purposes? Assume none of the 10 customers are related. a) $0 b) $250 c) $1,500 d) $3,000 Consider the facts from the question above, but now assume 2 of the 10 customers are a mother and her 13 year old son.

b) $250 Now it's only 9 unique people so only allowed 9 x 25 = $225

Which of the following business-related travel expenses are always deductible? I. Regular Workplace to Temporary Work Location II. Regular Workplace to Second Job III. Second Job to Home IV. Home to Temporary Work Location (Regardless of whether you have a regular job location) a) I b) I & II c) I, II, & IV d) II & IV e) I, II, III, & IV

b) I & II

Under what circumstances are expenses incurred by a spouse or family member accompanying the taxpayer on a business trip allowable as a deduction? a) If the family member attends any of the business meetings or seminars b) If there is a bona fide business purpose for the person's presence and the spouse or family member is an employee of the taxpayer c) If the family member is responsible for making a schedule of events during the trip d) If the family member pays for their own expenses

b) If there is a bona fide business purpose for the person's presence and the spouse or family member is an employee of the taxpayer

Which of the following is/are trade or business expenses? I. Mahlon incurs expenses related to investing in stocks and bonds. Mahlon is a Sociology professor at State University but spends 10-15 hours per week on his investments. Almost 2/3 of Mahlon's annual income comes from his investments as dividends and interest. II. Shaheen has expenses related to managing her portfolio of securities. The short-term trading of her securities generates most of her annual income. She has no other job. a) Only statement I is correct. b) Only statement II is correct. c) Both statements are correct. d) Neither statement is correct.

b) Only statement II is correct.

What does it mean for a cost to be considered ordinary for the purpose of a business claiming a business deduction? a) The cost must be regular and frequent for the specific business b) The cost must by customary for the industry the business operates in c) The cost must be reasonable by the standards of society d) The cost must be necessary for the specific business e) None of the above

b) The cost must by customary for the industry the business operates in

Michelle is a bank president and a weekend artist. She regularly sells her paintings at flea markets and spends an average of 9 hours a week painting or selling. Although she made about $6,000 last year from sales of artwork, she tells her friends she would do it for free. For the current tax year, she incurs expenses of $800 primarily for admission fees to flee markets and art fairs. The $800 is I. deductible for AGI as a business expense. II. is not deductible. III. is deductible only because she has revenue from the activity.​ a. Only statement III is correct. b. Only statement II is correct. c. Statements I and II are correct. d. Statements II and III are correct. e. Statements I, II, and III are correct.

b. Only statement II is correct.

Which of the following is/are trade or business expenses? I. Solly incurs legal expenses related to real estate he leases to Bucko Burger Hamburger Haven for a parking lot. Solly does little but negotiate the lease every year. II. Susan owns several rental apartments. She negotiates new rental contracts, arranges for repairs and maintenance, and handles all leasing activities. ​ a. Only statement I is correct. b. Only statement II is correct. c. Both statements are correct. d. Neither statement is correct.

b. Only statement II is correct.

Which of the following payments are deductible? I. Wilcox pays $1,000 to run an add in the program of the state Independent Party convention II. Wilcox is in the construction business. In January, he sends his chief financial officer to Washington, D.C., to monitor current legislation affecting the real estate industry. Expenses totaled $2,100. III. In March, Wilcox personally travels to Washington, D.C., to testify before the banking subcommittee on the effects of proposed legislation on the construction industry. Expenses totaled $2,300. a. Only statement I is correct. b. Only statement II is correct. c. Only statement III is correct. d. Statements II and III are correct. e. Statements I and II are correct.

b. Only statement II is correct.

Christy purchases $1,000-worth of supplies from a local vendor. The supplies are delivered on March 29, of the current year. The supplies are fully used up by year end. Because of unusual circumstances, a bill for the supplies arrives from the vendor on January 10, of the next year, and is promptly paid. When can Christy deduct the expenses? I. In the current tax year, if she is an accrual basis taxpayer. II. In the next tax year, if she is a cash basis taxpayer. ​ a. Only statement I is correct. b. Only statement II is correct. c. Both statements are correct. d. Neither statement is correct.

c. Both statements are correct.

Sadie is a full time nurse and a part time painter. Her painting qualifies as a hobby. Her gross income from painting is $7,000. Her expenses include $800 of interest on inventory loans, $5,200 of expenses in conducting business activities, and $2,000 of depreciation of equipment. Which of the following statements about Sadie's hobby activity is/are correct? I. Sadie will not recognize any taxable income as a result of her hobby. II. Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the year. III. Sadie will lose at least $1,000 of her depreciation deduction for the current year. IV. If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses. ​ a. Statements I and II are correct. b. Statements II and III are correct. c. Statements III and IV are correct. d. Statements I, II, and III are correct. e. Statements II, III, and IV are correct.

c. Statements III and IV are correct.

Tina is a covered employee for privately traded company. What is her maximum salary the privately traded company can deduct annually? a) $100,000 b) $1,000,000 c) $5,000,000 d) A reasonable amount for Tina's position, not to exceed $1,000,000

d) A reasonable amount for Tina's position, not to exceed $1,000,000

Marian, a schoolteacher in Duluth, Minnesota, owns a rental house in Scottsdale, Arizona. She travels to Arizona during spring break to inspect her property and discuss property improvements with the tenant and property manager. Marian's brother, Brian, lives in Scottsdale. She stays at his house during her week in Arizona and borrows his car to travel across town for her day of meetings. Her trip accomplishes several objectives: a visit with her brother, a trip away from Wisconsin's winter weather, and a review of her investment property. The expenses of traveling to Scottsdale I. have a dominant business purpose. II. are deductible as expenses for the production of income. a) Only statement I is correct. b) Only statement II is correct. c) Both statements are correct. d) Neither statement is correct.

d) Neither statement is correct.

Which of the following is/are currently deductible trade or business expenses? I. Membership dues to an environmental lobbying group. II. Cost of acquiring a new business automobile. a) Only statement I is correct. b) Only statement II is correct. c) Both statements are correct. d) Neither statement is correct.

d) Neither statement is correct.

Which of the following is not a criteria of a deductible meal and entertainment expense for business purposes. a) Must be an ordinary and necessary expense of the business b) A bona fide business activity must take place during the meal or entertainment c) The expenses are related to the taxpayers and people involved in the business activity d) The business cannot deduct more than 75% of the total expense

d) The business cannot deduct more than 75% of the total expense (this is 50%, not 75%)

Wanda owns and operates a restaurant on the north side of Cleveland. She is considering opening a second restaurant on the south side of town and incurs $13,600 of investigation expenses. In July of the current year, Wanda decides not to open a second restaurant. How much of the investigation expenses can Wanda deduct in the current year? a. $- 0 - b. $5,000 c. $5,120 d. $5,600 e. $13,600

e. $13,600

Mike and Pam own a cabin near Teluride, Colorado. In the current year the cabin was rented for 8 days to friends. Mike and Pam used the cabin a total of 82 days during the same year. After allocating the expenses between personal and rental use, the following rental loss was determined: Rental income $700 Property taxes (250) Mortgage interest (300) Repairs and maintenance (100) Utilities (150) Rental loss $(100) ​ How should Mike and Pam report the rental income and expenses for last year? a. Report the $100 loss for AGI. b. Include the $700 in gross income, but no deductions are allowed. c. Only expenses up to the amount of $700 rental income may be deducted. d. Report the interest ($300) and taxes ($250) as itemized deductions and the other expenses for AGI. e. No reporting for the rental activity is necessary.

e. No reporting for the rental activity is necessary.

Mary, a self-employed accountant, travels to Seattle to attend a conference for 28 days. She decides to bring her husband and two children on the trip as well, but they only stay for 7 days. The cost of the plane ticket was $400/person, meals totaled $20/person/day, and the hotel cost $200/night, regardless of how many people occupied the room. Mary took a taxi to and from the conference center every day for $10, and each morning her family was in Seattle, they rode along and went to a nearby museum while Mary was at the conference. The taxi did not charge more for her family to ride along with her. How much is Mary allowed to deduct as expenses? a) $5,020 b) $6,030 c) $6,280 d) $6,840 e) $8,040 f) $6,560

f) $6,560 Mary is allowed to deduct the entire cost of her plane ticket, as well as the cost of half of her meals, and the entire cost of her hotel, and taxi rides for the entire time, since she would have to pay the same price for the taxi, even if her family did not ride with her. $400 + 1/2($20 x 28) + ($200 x 28) + ($10 x 28) = $6,560

Trade/business - loss _________

fully deductible