Chapter 7 Tax
Louie is a self-employed taxpayer and also an investor in the stock market in his spare time. In the current year, Louie incurs $2,500 of travel expenses and $1,000 in registration fees related to attending investment seminars. Can Louie deduct the expenses for attending an investment seminar?
For 2019, the travel expenses related to attending the seminars are not deductible since they are related to the production of income under Sec. 212 rather than a trade or business. Also, the registration fees of $1,000 are not deductible as miscellaneous itemized deductions are no longer deductible. pp. I:7-8 and I:7-9.
If an individual belongs to a country club and uses the facility primarily for business entertainment of customers, what portion of the club dues is deductible?
For tax years 2018-2025, entertainment expenses are not deductible. Expenses related to country club dues are considered entertainment expenses and, therefore, are not deductible. However, if a self-employed individual pays for a business meal with a customer at a country club, the meal would be deductible. p. I:7-12.
Are deductions allowed for entertainment expenses in 2019?
For tax years 2018-2025, entertainment expenses are not deductible. p. I:7-12.
What difference does it make if a nonqualified stock option has a readily ascertainable FMV on the grant date?
If a nonqualified stock option has a readily ascertainable FMV on the grant date, the employee recognizes ordinary income on the grant date equal to the difference between FMV and the option price. The employer receives a compensation deduction on the grant date equal to the same amount that is recognized by the employee. In such case, no tax consequences occur on the date the option is exercised and the employee recognizes capital gain or loss upon the sale or disposition of the stock. If a nonqualified stock option has no readily ascertainable FMV, no tax consequences occur on the grant date. On the exercise date, the employee recognizes ordinary income equal to the spread between the FMV and the option price and the employer receives a corresponding compensation deduction. pp. I:7-28 and I:7-29.
Babson Corporation is proposing the creation of a qualified profit-sharing plan for its employees. The proposed plan provides for vesting of employer contributions after 20 years because the company wants to discourage employee turnover and does not feel that short-term employees should qualify for benefits. Will this plan qualify? Why or why not?
No, generally employer-provided benefits must be 100% vested after five years of service. Taxpayers are permitted to use an alternative vesting plan that begins vesting after three years and full vesting occurs after seven years. p. I:7-22.
If a self-employed individual uses the actual method of deducting automobile expenses and claims depreciation for the first two years of business use, can the individual switch to the standard mileage rate method for the third year and beyond?
The taxpayer may not switch to the standard mileage rate method. If a taxpayer depreciates an automobile under MACRS or expenses all or part of the automobile under Sec. 179, a change to the standard mileage rate method is not permitted. p. I:7-11.
When a self-employed individual travels for business but mixes in some pleasure days, such as sightseeing, how does the taxpayer deduct expenses connected with the travel expenses to and from the destination as well as expenses while at the destination (such as hotel, meals, etc.)?
When a taxpayer mixes business and pleasure on a trip, the tax law requires that the trip be deemed as either primarily business or primarily personal. If the trip is primarily business (more days spent on business than pleasure), the entire cost of the transportation to and from the destination is deductible. Other expenses, such as hotel and meals, are deductible only on the business days. If the trip is primarily personal, no expenses incurred in travelling to and from the destination are deductible. The other costs (hotel, meals, etc.) are deductible for the business days. p. I:7-7 and I:7-8.
In each of the following cases involving travel expenses, indicate how each item is reported on the taxpayer's tax return for 2019. Include any limitations that might affect its deductibility. Marilyn lives in Houston and owns several rental properties in Denver. To supervise the management of these properties, Marilyn incurs travel expenses including airfare, lodging, and meals while traveling to and from the location of the rental properties. Marc is an employee who incurs travel expenses as a salesperson. The expenses are fully reimbursed by his employer after an adequate accounting has been made. Assume the same facts as in Part b, except that the expenses are not reimbursed. Kay is a self-employed attorney who incurs travel expenses (including meals) to prepare a court case in a nearby city where she spends the night.
a. Marilyn may deduct the travel expenses for 2019 including airfare, lodging, and meals for AGI assuming that the trips are necessary and not personal in nature. (Note: the business meal portion of this expense is reduced by 50%.) b. For 2019, reimbursed travel expenses of employees are no longer deductible. However, since the reimbursements are made pursuant to an accountable plan, Marc will not report the reimbursement or the deductions on his return. Mark will not report the reimbursement as his employer maintained an accountable plan. c. Marc may not deduct unreimbursed expenses as a miscellaneous itemized deduction in 2019. Miscellaneous itemized deductions are not deductible for tax years 2018-2025. d. Kay may deduct travel expenses for AGI for 2019. Any business meals are reduced by 50%. pp. I:7-2 through I:7-8.
Discuss whether either of the following individuals are entitled to an office-in-home deduction: Maggie is a self-employed management consultant who maintains an office in her home exclusively used for client meetings and other business-related activities. Maggie has no other place of business and her office is the most significant place for her business. She has substantial income from the consulting practice. Bobby operates his own sole proprietorship as an electrician. He maintains an office at home where he keeps his books, takes phone calls from customers, and does the payroll for his five employees. All of his electrical work is done at the location of his customers.
a. Yes, Maggie is entitled to an office-in-home deduction because the office is used exclusively on a regular basis as the principal place of business for a trade or business, and it is used as a place for meeting or dealing with patients, clients, or customers in the normal course of business. Additionally, her office is the most significant place for the conduct of her business activities. She is self-employed. b. An office in home qualifies as a taxpayer's principal place of business if (1) the office is used by the taxpayer for administrative or management activities of the taxpayer's trade or business, and (2) there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business. Since Bobby does not have an office at another location and he conducts substantially all of his administrative and management activities from his office in his home, he will be able to deduct office in home expenses as a for AGI deduction on Schedule C. pp. I:7-18 through I:7-20
Why is it 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 the expense for determining AGI on Schedule C, Form 1040. In addition, employers pay certain payroll taxes on behalf of their employees. On the other hand, an individual's employment-related activities, such as travel and transportation, are no longer deductible in tax years 2018-2025. Individuals may prefer to be classified as employees rather than independent contractors because the employee portion of the social security tax rate in 2019 of 7.65% is less than the self-employment tax rate of 15.3%. This difference is mitigated somewhat because 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 2.90% rate for self-employed individuals.
