IRS Enrolled Agent Exam Unit 4

Elaine is a cash-basis taxpayer and sells cosmetics on commission. In December 2014, Elaine receives $10,000 of income from commissions, plus an advance of $1,000 for future commissions in 2015. She also receives $200 of expense reimbursements from her employer after turning in her receipts as part of an accountable plan. How much income should Elaine report on her 2014 tax return? A. $0 B. $11,000 C. $11,200 D. $10,200

B. Elaine's commissions must be included in gross income, as well as advance payments in anticipation of future services, when received by a cash-basis taxpayer. The expense reimbursements from her employer would not be included in gross income.

Which of the following fringe benefits is taxable (or partially taxable) to the employee? A. Health insurance covered by 100% by the employer B. Employer-provided parking at $275 per month C. Group term life insurance coverage of $50,000 D. Employer contributions to an employee's 401(k) plan.

B. Employer-provided parking is an excludable benefit of up to $250 per month. Therefore, the amount above $250 ($275-$250 = $25) is taxable to the employee.

Income was constructively received in 2014 in each of the following situations except: A. Wages were deposited in the taxpayer's bank account on December 26, 2014, but were not withdrawn by the taxpayer until January 3, 2015. B. A taxpayer was informed his check for services rendered was available on December 15, 2014. The taxpayer did not pick up the check until January 30, 2015. C. A taxpayer received a check by mail on December 31, 2014, but did not deposit the check until January 5, 2015. D. A taxpayer's home was sold on December 28, 2014. The payment was not received by her until January 2, 2015, when the escrow company released the funds.

D. A taxpayer does not need physical possession of income in order to have constructive receipt. However, income is not considered constructively received if the taxpayer cannot access the funds because of restrictions. Since the taxpayer's control of the receipt of the funds in the escrow account was substantially limited until the transaction had closed, the taxpayer did not constructively receive the income until the following year.

Which of the following tip income is exempt from federal income tax? A. Tips of less than $20 per month B. Noncash tips C. Tips not reported to the employer D. All tips are taxable

D. All tip income is subject to federal income tax, whether cash or noncash. An individual who receives less than $20 per month of tips while working one job does not have to report the tip income to his employer, but the income is still subject to federal income tax and must be reported on the taxpayer's Form 1040.

Of the following, only ______ is not taxable income. A. A holiday bonus B. Overtime pay. C. Vacation pay D. A travel reimbursement

D. Travel reimbursements, if paid through an accountable plan, are not included in an employee's wages.

Which of the following types of fringe benefits are deductible by an employer but not taxable to the employee? A. De minimis fringe benefits B. Use of an employer's apartment, vacation home, or boat. C. Membership at a country club or athletic facility D. A gift card.

A. A de minimis fringe benefit is deductible by the employer but it is not taxable to the employee. The IRS defines a de minimis benefit in this way: a benefit that, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. For example, a de minimis fringe benefit might include occasional snacks, coffee, or doughnuts provided in a company's break room.

Brendan is a flight attendant who earned wages of $30,000 in 2014. The airline provided free transportation on standby from his home in Little Rock to the airline's hub in Charlotte. The fair market value of the commuting flights was $5,000. Brendan also received reimbursements under an accountable plan of $10,000 for overnight travel, but only spent $6,000. He returned the excess to his employer. Brendan was injured on the job and received worker's compensation of $4,000. What amount must he include in his gross income? A. $30,000 B. $34,000 C. $35,000 D. $37,000

A. Brendan only has to include his wages in his 2014 return. The free flights offered on standby to airline personnel are considered no-additional-cost services and are not taxable tot he employee. Reimbursements under an accountable plan and amounts paid for worker's compensation are nontaxable. Since Brendan returned the unspent amounts to his employer, the travel reimbursements qualify under an accountable plan, and the amounts spent are not taxable to him.

Randall is an ordained minister in the Evangelical Church of Chicago. He owns his own home and his monthly house payment is $900. His monthly utilities total $150. Fair rental value in the neighborhood is $1000. Randall receives a housing allowance from his church in the amount of $950 per month. What amount of his housing allowance would he include in his gross income? A. $0 B. $100 per month C. $150 per month D. $950 per month

A. Clergy members may exclude from gross income for income tax purposes but not for self-employment tax purposes the rental value of a home or a rental allowance to the extent the allowance is used to provide a home, even if deductions are taken for home expenses paid with the allowance.

Max owns a restaurant. He furnishes one of the waitresses, Caroline, two meals during each workday. Max encourages (but does not require) Caroline to have her breakfast on the business premises before starting work so she can help him answer phones. She is required to have her lunch on the premises. How should Max treat this fringe benefit to Caroline? A. None of Caroline's meals at the restaurant are taxable. B. All of Caroline's meals at the restaurant are taxable. C Caroline's lunch is not taxable but her breakfast is. D. Caroline's meals are taxed at a flat rate of 15%.

A. Meals furnished to Caroline are not taxable because they are for the convenience of the employer. Meals that employers furnish to a restaurant employee during, immediately before, or after the employee's working hours are considered furnished for the employer's convenience. Since Caroline is a waitress who works during the normal breakfast and lunch periods, Max can exclude from her wages the value of those meals. If Max allowed Caroline to have meals without charge on her days off, the value of those meals would be included in her wages.

Marco is employed as an accountant by a large firm. When he travels for his audit work, he submits his travel receipts for reimbursement by his firm, which has an accountable plan for its employees. Which of the following statements is correct about accountable plans? A. The reimbursed amounts are not taxable to Marco. B. Marco may still deduct his travel expenses on his tax return. C. His employer cannot deduct the travel expenses, even though Marco was reimbursed in full. D. Reimbursed expenses are taxable to the employee, and the employer can also deduct the expenses as they would any other current expense.

A. Under an accountable plan, employee reimbursements are not included in the employee's income. The employer can deduct the expenses as current expenses on its tax return. The employee is not required to be taxed on any amounts received in accordance with the terms of a qualified accountable plan.

Chaz is a naval officer who was injured while serving in a combat zone. He was later awarded Veterans Affairs (VA) disability benefits. How are these payments reported on Chaz's tax return? A. 100% of the disability benefits may be excluded from income. B. Up to 50% of the disability benefits may be excluded from income. C. 100% of the disability benefits may be excluded from income for enlisted personnel but not for officers. D. The disability benefits are taxable.

A. VA Disability compensation is exempt from taxation, if the veteran was terminated through separation or discharged under honorable conditions. The VA does not issue form W-2, Form 1099-R, or any other tax-related document for veterans' disability benefits.

What is adjusted gross income? A. The sum of all sources of taxable income that the taxpayer receives during the year. B. The amount of earned income a taxpayer receives during the year. C. Another term for taxable income. D. Gross income minus certain allowable deductions or adjustments, calculated before exemptions and the standard deduction or itemized deductions are taken.

Adjustable gross income (AGI) is gross income (the sum of all income subject to taxation that the taxpayer receives during the year) minus certain allowable deductions or adjustments. AGI is calculated before exemptions and the standard deduction or itemized deductions are taken.

Salvador is an enlisted soldier in the US Army who served in a combat zone from January 1 to September 2 of 2014. He transferred to the US and received his regular duty pay for the remainder of the year. How many months of his income are taxable for 2014? A. Zero. All the income is tax-free B. Three months are subject to tax. C. Four months are subject to tax. D. Twelve months are subject to tax.

B. If a taxpayer serves in a combat zone as an enlisted person for any part of a month, all of his pay received for military service that month is excluded from gross income. Since Salvador served for a few days in September, all the income in September is excluded as combat pay and only October through December would be taxable.

Debby broke her leg in a car accident in 2014 and was unable to work for three months. She received an accident settlement of $13,000 from her insurance company. during this time, she received $7,500 of sick pay from her employer. In addition, she received $5,000 from the accident policy she had purchased herself. How much of this income is taxable to Debby? A. $5,000 B. $7,500 C. $12,500 D. $18,000

B. Only Debby's sick pay is taxable as wages. Sick pay from an employer is taxable like wages and is therefore included in Debby's gross income. Settlements for personal injuries from an accident are not taxable. If a taxpayer pays the full cost of an accident insurance plan, the benefits for personal injury or illness are not included in income. If the employer pays the cost of an accident insurance plan, the amounts are taxable to the employee.

Marisol received the following income and fringe benefits in 2014: Wages -- $30,000 End of year bonus -- 2,000 Parking pass per month -- 90 Employer contributions to her 401(k) plan -- 900 FMV free gym on her employer's premises -- 500 How much income must Marisol report on her 2014 tax return? A. $30,000 B. $32,000 C. $32,500 D. $34,480

B. Only the wages and the bonus are taxable ($30,000 + $2,000). The parking pass is a notaxable transportation benefit, and the employer contributions are not taxable until Marisol withdraws the money from her retirement account. Marisol does not have to report the use of the gym because it is on the employer's premises and therefore not taxable.

Marnie was the beneficiary on her mother's life insurance policy. Her mother died on December 12, 2014. Marnie received the following payments on January 3, 2015. -- $45,000 death benefit from her mother's life insurance policy. -- $120 of interest income on the life insurance proceeds. What is the proper treatment of these payments? A. The insurance benefit and interest income are both taxable in 2014. B. The insurance benefit and interest income are both taxable in 2015. C. The $120 of interest income is taxable in 2015. D. None of these payments are taxable to Marnie. Instead, they are taxable to her mother's estate.

C. Life insurance proceeds are not taxable to the recipient. Interest earned on the life insurance proceeds is taxable. Marnie must report the interest income in the year she received it.

Rob owns a business that has a $10,000 profit in 2014. His wife, Cecilia, has a business loss of $12,000 for 2014. They both file Schedule C to report their self-employment income. Which of the following statements is correct? A. On their joint return, they will not have to pay self-employment tax because the losses from Cecilia's business offset Rob's income. B. They can file MFS and offset each other's self-employment tax. C. Rob must pay self-employment tax on $10,000, regardless of his wife's losses. D. If they choose to file separate returns, they may split the profits and losses between their two businesses.

C. Rob must pay self-employment tax on $10,000, regardless of how how and Cecilia choose to file. Taxpayers cannot combine both spouses' income or loss to determine their earnings subject to SE tax. However, if a taxpayer has more than one business, he must combine the net profit or loss from each to determine the total earnings subject to SE tax.

Which of the following fringe benefits provided by the employer will result in taxable income to the employee? A. A cell phone used by a salesperson to talk to clients while on the road. B. Reimbursements paid by the employer for qualified business travel expenses. C. Use of a company van for commuting. Occasional personal use of the office copy machine.

C. The use of a company vehicle for commuting is not a qualified fringe benefit. Commuting expenses are not deductible. Use of a company van after normal working hours is personal use and not business use, so it would result in taxable income to the employee. The cell phone, reimbursements, for business travel, and the occasional personal use of an office copy machine are noncash fringe benefits that are not taxable.

Self-employment income does not include: A. Income of ministers, priests, and rabbis for the performance of services such as baptisms and marriages. B. The share of partnership income allocated to general partners on Schedule K-1. C. Wages earned by a temporary employee. D. Payments to independent contractors.

C. Wage income is never considered self-employment income. The other examples listed are all types of self-employment income and subject to self-employment tax on Form 1040.