Exam 3 Prep, ACCT 3353

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Computers and peripheral equipment.

5 yrs

"The expenses were incurred to maintain or improve existing skills required in the present job.

" " True. If the education incidentally results in a promotion or raise, the deduction still can be taken as long as the education maintained and improved existing skills and did not qualify a person for a new trade or business."

The expenses were incurred to meet the minimum educational standards for qualification in the taxpayer's existing job.

" False. "

As a general rule, it is more advantageous to capitalize IDCs.

" False. As a general rule, it is more advantageous to expense IDCs. The obvious benefit of an immediate write-off (as opposed to a deferred write-off through depletion) is not the only advantage. Because a taxpayer can use percentage depletion, which is calculated without reference to basis, the IDCs may be completely lost as a deduction if they are capitalized."

A contribution to a Roth IRA allows the taxpayer a deduction for AGI.

" False. For a traditional IRA, an employee is allowed a deduction for AGI. No tax benefit (i.e., exclusion or deduction) results from the initial contribution to a Roth IRA. Instead, later distributions (including post-contribution earnings) are recovered tax-free."

A one-day business trip is travel status, and meals and lodging for such a trip are deductible.

" False. The crucial test for the deductibility of travel expenses is whether the employee is away from home overnight. ""Overnight"" need not be a 24-hour period, but it must be a period substantially longer than an ordinary day's work and must require rest, sleep, or a relief-from-work period. A one-day business trip is not travel status, and meals and lodging for such a trip are not deductible."

The expense must be employment related.

" False. The expense need not be employment related, although it can be."

Travel as a form of education is deductible.

" False. Travel as a form of education is not deductible. If, however, the education qualifies as a deduction, the travel involved is allowed."

New clothes

" No. Clothes are nondeductible personal expense."

All reimbursements of expenses are reported in full as wages on the employee's Form W-2.

" Nonaccountable plan. A nonaccountable plan is a plan in which an adequate accounting or return of excess amounts, or both, is not required. All reimbursements of expenses are reported in full as wages on the employee's Form W-2. Any allowable expenses are deductible in the same manner as unreimbursed expenses."

If the taxpayer's goal is to recover the cost of fixed assets as quickly as possible, the taxpayer should choose assets with longer lives when electing § 179 expensing.

" True. A consideration when making decisions with respect to cost recovery is whether fast or slow cost recovery will be more beneficial for the taxpayer. If the taxpayer's goal is to recover the cost of fixed assets as quickly as possible, the following strategies should be used: (1) When electing § 179 expensing, choose assets with longer lives and (2) Choose accelerated cost recovery methods where available."

For travel expenses to be deductible, a convention must be directly related to the taxpayer's trade or business.

" True. If the proceedings of the convention are videotaped, the taxpayer must attend convention sessions to view the videotaped materials along with other participants. However, a deduction will be allowed for costs (other than travel, meals, and entertainment) of renting or using videotaped materials related to business."

If a taxpayer has a new business with little income or a business with a net operating loss carryover, the taxpayer's goal may be to slow down cost recovery. In such a situation, the taxpayer should choose the straight-line cost recovery method.

" True. In such a situation, the taxpayer should: (1) Elect not to take additional first-year depreciation, if available; (2) Choose the straight-line cost recovery method; (3) Make no election under § 179; (4) Defer placing assets in service in the current tax year or postpone capital outlays until future tax years."

Intangible drilling and development costs can be either charged off as an expense in the year in which they are incurred or capitalized and written off through depletion.

" True. Intangible drilling and development costs can be handled in one of two ways at the option of the taxpayer. They can be either charged off as an expense in the year in which they are incurred or capitalized and written off through depletion. The taxpayer makes the election in the first year such expenditures are incurred, either by taking a deduction on the return or by adding them to the depletable basis."

The deduction is "for" AGI.

" True. The deduction for AGI classification avoids the 2 percent-of-AGI floor on miscellaneous itemized deductions."

The tax home is the area in which the taxpayer derives his or her source of income.

" True. Under ordinary circumstances, determining the location of a taxpayer's tax home does not present a problem. The tax home is the area in which the taxpayer derives his or her source of income. It is possible for a taxpayer never to be away from his or her tax home."

When a taxpayer has more than one place of business or work, the main one is considered to be the tax home.

" True. When a taxpayer has more than one place of business or work, the main one is considered to be the tax home. This is determined by considering the time spent, the level of activity involved, and the income earned at each job."

The employer makes training available to provide needed job skills.

" Yes. "

In 2019, Robert entertains four key clients and their spouses at a nightclub. Business discussions occurred over dinner and prior to the entertainment beginning. Expenses were $200 (limo charge), $120 (cover charge), $700 (drinks and dinner), and $140 (tips to servers). If Robert is self-employed, how much can he deduct as an entertainment expense for this event?

Stork Associates paid $60,000 for a 20-seat skybox at Veterans Stadium for eight professional football games. Regular seats to these games range from $80 to $250 each. At one game, an employee of Stork entertained 18 clients. Stork furnished food and beverages for the event at a cost of $1,300. The game was preceded by a bona fide business discussion, and all expenses are adequately substantiated. How much may Stork deduct as an entertainment expense for this event?

Maple Company acquires a new machine (seven-year property) on January 10, 2019, at a cost of $125,000. Maple makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. Maple does not take additional first-year depreciation. What is the total deduction in calculating taxable income related to the machine for 2019 assuming Maple has taxable income of $800,000?

$125,000.

On March 25, 2019, Parscale Company purchases the rights to a mineral interest for $9,586,000. At that time, the remaining recoverable units in the mineral interest are estimated to be 787,800 tons. If required, round any division to two decimal places and use in subsequent computations. Round your final answer to the nearest dollar. If 709,020 tons are mined and 118,170 tons are sold this year, calculate Parscale's cost depletion for 2019.

1,438,129

Single-purpose agricultural or horticultural structures

10 yrs

Land improvements.

15 yrs

Water utilities.

20 yrs

34. Weston acquires a new office machine (7-year class asset) on August 2, 2017, for $75,000. This is the only asset Weston acquired during the year. He does not elect immediate expensing under § 179. He claims the maximum additional first-year depreciation deduction. On September 15, 2019, Weston sells the machine. b. Determine Weston's cost recovery for 2019.

2019 MACRS cost recovery [$37,500 × (0.1749 × 1/2)] $ 3,279

Euclid acquires a 7-year class asset on May 9, 2019, for $237,600 (the only asset acquired during the year). Euclid does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. Calculate Euclid's cost recovery deduction for 2019 and 2020.

2019: 33,953 2020: 58,188

Diana acquires, for $291,200, and places in service a 5-year class asset on December 19, 2019. It is the only asset that Diana acquires during 2019. Diana does not elect immediate expensing under § 179. She elects additional first-year deprecation. Click here to access the depreciation table to use for this problem. Calculate Diana's total cost recovery deduction for 2019.

291,200

Any horse that is not a racehorse and is more than 12 years old at the time it is placed in service.

3 yrs

Peter Samuels owns and manages his single-member LLC that provides a wide variety of financial services to his clients. He is married and will file a joint tax return with his spouse, Amy. His LLC reports $300,000 of qualified business income, W-2 wages of $120,000, with qualified property with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $285,000 (this is also their modified taxable income). Determine their QBI deduction for 2019.

57,000

Office furniture, fixtures, and equipment.

7 yrs

The amount of expenses that is deemed substantiated is equal to the lesser of the per diem allowance or the amount of the Federal per diem rate.

Accountable plan. In lieu of reimbursing actual expenses for travel away from home, many employers reduce their paperwork by adopting a policy of reimbursing employees with a per diem allowance, a flat dollar amount per day of business travel. Of the substantiation requirements listed previously, the amount of the expense is proved, or deemed substantiated, by using such a per diem allowance or reimbursement procedure. The amount of expenses that is deemed substantiated is equal to the lesser of the per diem allowance or the amount of the Federal per diem rate.

Employee is required to return any excess reimbursement or allowance.

Accountable plan. This is one of two requirements for an accountable plan. An "excess reimbursement or allowance" is any amount the employee does not adequately account for as an ordinary and necessary business expense.

21. Samantha was recently employed by an accounting firm. During the year, she spends $2,500 for a CPA exam review course and begins working on a law degree in night school. Her law school expenses were $4,200 for tuition and $450 for books (which are not a requirement for enrollment in the course). Assuming no reimbursement, how much can Samantha deduct for the: B. Law school expenses?

Answer: $4,000. Under § 222, Samantha is limited to $4,000 of the tuition paid. The balance of $650 [$200 (excess tuition) + $450 (books)] will not qualify under the regular education expense deduction because the expenses relate to preparation for a different job.

26. McKenzie purchased qualifying equipment for his business that cost $212,000 in 2019. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. a. Calculate McKenzie's § 179 expense deduction for 2019 and any carryovers to 2020.

Answer: In 2019, § 179 permits the taxpayer to elect to deduct up to $1,020,000 of the acquisition cost of tangible personal property used in a trade or business. Two additional limitations apply to the amount deductible under § 179. First, the ceiling amount on the deduction is reduced dollar for dollar when § 179 property placed in service during the taxable year exceeds a maximum amount ($2,550,000 in 2019). Second, the § 179 deduction cannot exceed the taxpayer's trade or business taxable income, computed without regard to the § 179 amount. § 179 deduction before adjustment $212,000 Less: Dollar limitation reduction ($212,000 < $2,550,000) (-0-) Remaining § 179 deduction $212,000 § 179 deduction allowed due to business income limitation $ 5,600 § 179 deduction carryforward ($212,000 − $5,600) $206,400

34. Monica, a self-employed taxpayer, travels from her office in Boston to Lisbon, Portugal, on business. Her absence of 13 days was spent as follows: Thursday Depart for and arrive at Lisbon Friday Business transacted Saturday and Sunday Vacationing Monday through Friday Business transacted Saturday and Sunday Vacationing Monday Business transacted Tuesday Depart Lisbon and return to office in Boston

Answer: Monica cannot satisfy the seven-days test because she was away from home for more than seven days. Under the less-than-25% test and not counting partial days, she could have vacationed for three more days assuming that the days did not interfere with the preceding and succeeding days' provision.

25. Cindy maintains an office in her home that comprises 8% (200 square feet) of total floor space. Gross income for her business is $42,000, and her residence expenses are as follows: Real property taxes $2,400 Interest on mortgage 4,000 Operating expenses 2,200 Depreciation (based on 8% business use) 450 What is Cindy's office in the home deduction based on: a. The Regular Method?

Answer: Real property taxes $ 2,400 Interest on Mortgage $ 4,000 Operating expenses $ 2,200 Total Expenses to allocate $ 8,600 Indirect expenses allocated to home office ($8,600 x 8%) = $ 688 Depreciation Expense (based on allocation) $ 450 Total home office expense $ 1,138

Answer: Rex's adjusted basis in the business portion of the auto is determined as follows: Depreciable business basis ($40,000 × 80%) $32,000 Less depreciation (under automatic mileage method): 2015 (8,000 miles × 80% × 24 cents) (1,536) 2016 (19,000 miles × 80% × 24 cents) (3,648) 2017 (20,000 miles × 80% × 25 cents) (4,000) 2018 (15,000 miles × 80% × 25 cents) (3,000) Adjusted business basis of auto on 1/1/19 $19,816

Answer: $0. The IRS has disallowed any costs that lead to qualifying for a different trade or business.

38. On April 3, 2019, Terry purchased and placed in service a building that cost $2,000,000. An appraisal determined that 25% of the total cost was attributed to the value of the land. The bottom floor of the building is leased to a retail business for $32,000. The other floors of the building are rental apartments with an annual rent of $160,000. Determine Terry's cost recovery deduction for 2019.

Answer: $94 ($25 + $28 + $41). No deduction is allowed for Darryl's wife since the maximum gift allowed has already been used for Darryl. The gift to Darryl is $25 (maximum amount) + $3 (gift wrapping), or $28. No deduction is allowed for the gift to Veronica because she is Paul's boss. The lunch with Sarah is deductible subject to the 50% limit.

26. McKenzie purchased qualifying equipment for his business that cost $212,000 in 2019. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. b. How would your answer change if McKenzie decided to use addition first-year (bonus) depreciation on the equipment instead of using § 179 expensing?

Answer: Additional first-year depreciation is not limited to business income. As a result, McKenzie could deduct the entire $212,000 using bonus depreciation. However, other limitations may apply (e.g., the excess business loss limitation; see text Section 7-5).

31. In June of this year, Dr. and Mrs. Bret Spencer traveled to Denver to attend a three-day conference sponsored by the American Society of Implant Dentistry. Bret, a self-employed practicing oral surgeon, participated in scheduled technical sessions dealing with the latest developments in surgical procedures. On two days, Mrs. Spencer attended group meetings where various aspects of family tax planning were discussed. On the other day, she went sightseeing. Mrs. Spencer does not work for her husband, but she does their tax returns and handles the family investments. Expenses incurred in connection with the conference are summarized below. Airfare (two tickets) $2,000 Lodging (single and double occupancy are the same rate—$250 each day) 750 Meals ($200 × 3 days) 600 Conference registration fee (includes $120 for Family Tax Planning sessions) 620 Car rental 300 How much, if any, of these expenses can the Spencers deduct?

Answer: Although they may be very useful to her family, Mrs. Spencer's activities do not constitute a trade or business. Consequently, her expenses at the conference are not deductible. Bret's deductible expenses are as follows: Airfare (one ticket) $1,000 Lodging ($250 × 3 days) 750 Meals ($100 × 3 days) $300 Less: 50% limit (150) 150 Registration fee ($620 − $120) 500 Car rental 300 Total $2,700

Answer: If Monica does not satisfy the seven-days or less-than-25% test, then part of her transportation cost is not deductible.

24. Andre acquired a computer on March 3, 2019, for $2,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Calculate Andre's cost recovery deduction for the computer for tax years 2019 and 2020.

Answer: The IRS provides tables that specify cost recovery allowances for personalty and for realty. The taxpayer may elect to use the straight-line method for depreciable personal property. The property is depreciated using the class life (recovery period) of the asset with a half-year convention or a mid-quarter convention, whichever applies. The election is available on a class-by-class and year-by-year basis (see Concept Summary 8.4). The percentages for the straight-line election with a half-year convention appear in Exhibit 8.5. Therefore, the half-year convention applies (Exhibit 8.5). - 5 year class asset First year : 2019 $2,800 × 0.10 = $280. The factors on the table are in percentages. Second year : 2020 $2,800 × 0.20 = $560. The factors on the table are in percentages.

Answer: The building meets the 80% gross receipts from dwelling units test. Therefore, it is classified as residential real property. The building's depreciable basis is $1,500,000 [$2,000,000 (cost) − $500,000 (land)]. $1,500,000 × 0.02576 (Exhibit 8.8) = $38,640

27. On April 5, 2019, Kinsey places in service a new automobile that cost $60,000. He does not elect § 179 expensing, and he elects not to take any available additional first-year depreciation. The car is used 70% for business and 30% for personal use in each tax year. Kinsey chooses the MACRS 200% declining-balance method of cost recovery (the auto is a 5-year asset). Assume the following luxury automobile limitations: year 1: $10,000; year 2: $16,000. Compute the total depreciation allowed for 2019 and 2020.

Answer: The law places special limitations on cost recovery deductions for passenger automobiles. The luxury auto limits are imposed before any percentage reduction for personal use. The cost recovery limitations are maximum amounts. If the regular MACRS calculation produces a lesser amount of cost recovery, the lesser amount is used. Note: The 2018 luxury auto amounts are used. Year MACRS Amount Recovery Limitation Deduction Allowed 2019 $8,400 $7,000 $7,000 ($60,000 × 0.20 × 70%) ($10,000 × 70%) 2020 $13,440 $11,200 $11,200 ($60,000 × 0.32 × 70%) ($16,000 × 70%)

Answer: The office machine is 7-year class property; because it was acquired prior to September 28, 2017, bonus depreciation is limited to 50% of the machine's cost. 2017 Additional first-year depreciation ($75,000 × 50%) $37,500 MACRS cost recovery [($75,000 − $37,500) × 0.1429 (Exhibit 8.3)] 5,359 Total cost recovery $42,859 2018 MACRS Cost Recovery ($37,500 × 0.2449) $ 9,184

Answer: Thirteen days. Because travel days count as business and weekends count as business when preceding and succeeding days are business days, her entire absence is regarded as business.

32. In 2016, José purchased a house for $325,000 ($300,000 relates to the house; $25,000 relates to the land). He used the house as his personal residence. In March 2019, when the fair market value of the house was $400,000, he converted the house to rental property. What is José's cost recovery for 2019?

Answer: José's basis for cost recovery is $300,000 because the basis of the house at the date of the conversion from personal use to rental property ($300,000) is less than the $400,000 fair market value. The property is residential rental property that was placed in service after December 31, 1986. Therefore, the first section of Exhibit 8.8 is used for calculation. The cost recovery is $8,637 [$300,000 × 0.02879 (Exhibit 8.8)] (The cost recovery pertains to the first recovery year and it was placed in service during the third month.

22. Hamlet acquires a 7-year class asset on November 23, 2019, for $100,000 (the only asset acquired during the year). Hamlet does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Calculate Hamlet's cost recovery deductions for 2019 and 2020.

Answer: The mid-quarter convention applies if more than 40% of the value of property other than eligible real estate is placed in service during the last quarter of the year. Hamlet acquired 100% of assets in the last quarter of the year. Therefore, the mid-quarter convention applies (Exhibit 8.4). - 7 year class asset - Fourth quarter First year : 2019 $100,000 × 0.0357 = $3,570. The factors on the table are in percentages. Second year : 2020 $100,000 × 0.2755 = $27,550 The factors on the table are in percentages.

Sabin is an artist and maintains an office (his studio) in his home. His office occupies 8% (200 square feet) of the total floor space of his residence. Gross income from his business is $24,000. Expenses of the business (other than home office expenses) are $5,000. Sabin incurs the following home office expenses: Real property taxes on residence: $2,400 Interest expense on residence: $4,000 Operating expenses of residence: $2,200 Depreciation on residence (based on 8% business use): $450. Assuming Sabin uses the "simplified method" to compute the office in the home deduction, his deduction is $_______

Answer: $1,000. Because of the complexity involved in using the regular method and, in particular, the difficulty in working with Form 8829, the IRS has established an optional simplified method for the office in the home deduction. Presuming the taxpayer has met the requirements for the deduction (e.g., business purpose, exclusive use requirements), the amount allowed is $5 per square foot of space devoted to the office. However, as no more than 300 square feet can be counted, the maximum deduction is limited to $1,500. The various rules governing the use of the simplified method are summarized below. No depreciation on the residence can be claimed. Actual expenses of maintaining and operating the home are ignored. No unused deduction (e.g., in excess of the net income from the business) can be carried over to a future year. Nor can an unused deduction from a prior year be carried to a simplified method year. Note: Some of these expenses (e.g., qualified residence interest, property taxes) might otherwise be claimed elsewhere on the return. Further, these expenses can be claimed in full without any reduction due to a home office deduction being claimed. Sabin's deduction is based on the square footage. 200 x $5 (statutory rate) = $1,000.

Euclid acquires a 7-year class asset on May 9, 2019, for $80,000. Euclid does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. Euclid's cost recovery deduction is $_____for 2019 and $_____ for 2020.

Answers: $11,432; $19,592. MACRS provides separate cost recovery tables for realty and personalty. Cost recovery allowances for real property, other than land, are based on recovery lives specified in the law. The IRS provides tables that specify cost recovery allowances for personalty and for realty. MACRS provides that the cost recovery basis of eligible personalty (and certain realty) is recovered over 3, 5, 7, 10, 15, or 20 years. MACRS views property as placed in service in the middle of the asset's first year (the half-year convention). The tables automatically reflect this convention in the initial year. MACRS also allows for a half-year of cost recovery in the year of disposition or retirement. To determine the amount of the cost recovery allowances, simply identify the asset by class and go to the appropriate table for the percentage 2019: $80,000 x .1429 (Exhibit 8.3) = $11,432 and for 2020: $80,000 x .2449 (Exhibit 8.3) = $19,592.

Sabin is an artist and maintains an office (his studio) in his home. His office occupies 8% of the total floor space of his residence. Gross income from his business is $24,000. Expenses of the business (other than home office expenses) are $5,000. Sabin incurs the following home office expenses: Real property taxes on residence: $2,400 Interest expense on residence: $4,000 Operating expenses of residence: $2,200 Depreciation on residence (based on 8% business use): $450. Assuming Sabin uses the "regular method" to compute the office in the home deduction, his deduction is $________

Answer: $1,138. In arriving at the office in the home deduction, relevant expenses are categorized as direct or indirect. Direct expenses benefit only the business part of the home (e.g., the office is repainted) and are deducted in full. Indirect expenses are for maintaining and operating the home. Because they benefit both business and personal use, an allocation between the two is necessary. The allocation is made based on the floor space involved—divide the business area by the total home area to arrive at the business percentage. The allowable home office expenses cannot exceed the gross income from the business less all other business expenses attributable to the activity. Furthermore, the home office expenses that are allowed as itemized deductions anyway (e.g., mortgage interest and real estate taxes) must be deducted first. All home office expenses of an employee are miscellaneous itemized deductions, except those (such as interest and taxes) that qualify as other personal itemized deductions. Home office expenses of a self-employed individual are trade or business expenses and are deductible for AGI. The net income from the business (before office in the home deduction) is: Business income $24,000 - business expenses $5,000 = $19,000. Sabin's deduction is computed as follows: Real property taxes on residence: $2,400 x 8%= $192 Interest expense on residence: $4,000 x 8% = $320 Operating expenses of residence: $2,200 x 8% = $176 Depreciation on residence (based on 8% business use): $450 Total deduction: $192 + $320 + $176 + $450 = $1,138.

On March 25, 2019, Parscale Company purchases the rights to a mineral interest for $8,000,000. At that time, the remaining recoverable units in the mineral interest are estimated to be 500,000 tons. If 80,000 tons are mined and 75,000 tons are sold this year, the cost depletion is $_______.

Answer: $1,200,000 There are two methods of calculating depletion. Cost depletion can be used on any wasting asset (and is the only method allowed for timber). Percentage depletion is subject to a number of limitations, particularly for oil and gas deposits. Depletion should be calculated both ways, and the method that results in the larger deduction should be used. The choice between cost depletion and percentage depletion is an annual decision; the taxpayer can use cost depletion in one year and percentage depletion in the following year. Cost depletion is determined by using the adjusted basis of the asset. The basis is divided by the estimated recoverable units of the asset (e.g., barrels or tons) to arrive at the depletion per unit. This amount then is multiplied by the number of units sold (not the units produced) during the year to arrive at the cost depletion allowed. Cost depletion, therefore, resembles the units-of-production method of calculating depreciation. The depletion per ton is $16 ($8,000,000 adjusted basis / 500,000 estimated recoverable tons). If 75,000 are sold this year, the cost depletion is $1,200,000 ($16 depletion per ton x 75,000 tons sold).

In 2019, Ensley drove her automobile 28,500 miles. She incurred the following expenses during the year related to the automobile: Gas and oil, lubrication: $1,800 Insurance: $980 Repairs: $360 Licenses and registration fees: $50 Business parking and tolls: $170 She uses the automobile 80% for business. Based on the data, Ensley's automobile deduction under the actual cost method is $______

Answer: $2,722. Under the actual cost method, the actual cost of operating the automobile is used to compute the deduction. The percentage of business use is multiplied by the total cost for each expense. Actual costs include the following expenses: Gas and oil, lubrication Depreciation (or lease payments) Insurance Dues to auto clubs Repairs Tires and other parts Licenses and registration fees Business parking and tolls. Ensley's deduction is $2,722. [($1,800 + $980 + $360 + $50) x 80% = $2,552 + $170*]. *Note: 100 percent of the business parking and tolls are deductible.

Three years ago, Marshall purchased an automobile for personal purposes for $38,000. In 2019, he contributes the automobile to his business. At the time of the contribution the automobile was appraised for $22,000. The basis for cost recovery of the automobile is $______

Answer: $22,000. If personal use assets are converted to business or income-producing use, the basis for cost recovery and for loss is the lower of the adjusted basis or the fair market value at the time the property was converted. As a result of this lower-of basis rule, losses that occurred while the property was personal use property are not recognized for tax purposes through the cost recovery of the property. The basis for cost recovery of the automobile is $22,000 because the fair market value is less than the adjusted basis. The decline in value is deemed to be personal (because it occurred while the property was held for personal use by Marshall) and therefore nondeductible.

Jebali Company reports gross income of $340,000 and other property-related expenses of $229,000 and uses a depletion rate of 14%. Jebali Company depletion allowance is $______.

Answer: $47,600.There are two methods of calculating depletion. Cost depletion can be used on any wasting asset (and is the only method allowed for timber). Percentage depletion is subject to a number of limitations, particularly for oil and gas deposits. Depletion should be calculated both ways, and the method that results in the larger deduction should be used. The choice between cost depletion and percentage depletion is an annual decision; the taxpayer can use cost depletion in one year and percentage depletion in the following year. Percentage depletion (also referred to as statutory depletion) uses a specified percentage provided by the Code. The percentage varies according to the type of mineral interest involved. The rate is applied to the gross income from the property, but in no event may percentage depletion exceed 50 percent of the taxable income from the property before the allowance for depletion. Note that percentage depletion is based on a percentage of the gross income from the property and makes no reference to cost. Thus, when percentage depletion is used, it is possible to claim aggregate depletion deductions that exceed the original cost of the property. If percentage depletion is used, however, the adjusted basis of the property (for computing cost depletion in a future tax year) is reduced by the amount of percentage depletion taken until the adjusted basis reaches zero.

Complete the statements below regarding employee and self-employed status. Self-employed persons ______to be included in various fringe benefit programs (e.g., group term life insurance and retirement plans). Because they _____covered by FICA and FUTA, these payroll costs are _____ by the employer.

Answers: do not have; are not; avoided. Unlike employees, self-employed persons do not have to be included in various fringe benefit programs (e.g., group term life insurance and retirement plans). Because they are not covered by FICA and FUTA, these payroll costs are avoided. The IRS is very much aware of the tendency of businesses to wrongly classify workers as self-employed rather than as employees. In terms of tax consequences, employment status makes a great deal of difference to the persons who perform the services. Expenses of self-employed taxpayers, to the extent allowable, are classified as deductions for AGI and are reported on Schedule C (Profit or Loss From Business) of Form 1040.

Diana acquires and places in service a 5-year class asset, costing $65,000, on December 19, 2019. Diana does not elect immediate expensing under § 179. She elects additional first-year depreciation. Click here to access the depreciation table to use for this problem. Diana's total cost recovery deduction for the asset is $______for 2019.

Answer: $65,000. The TCJA of 2017 allows taxpayers to deduct 100 percent cost recovery in the year qualified property is placed in service. The term qualified property includes most depreciable assets other than buildings with a recovery period of 20 years or less. For property placed in service after September 27, 2018, bonus depreciation applies to both new and used property (prior law restricted bonus depreciation to new property). The additional first-year depreciation is taken in the year in which the qualifying property is placed in service. After the additional first-year depreciation is calculated, the standard MACRS cost recovery allowance is calculated by multiplying the cost recovery basis (original cost recovery basis less additional first-year depreciation) by the percentage that reflects the applicable cost recovery method and convention. Congress added the mid-quarter convention that applies if more than 40 percent of the value of property other than eligible real estate is placed in service during the last quarter of the year. Since the asset was purchased during the last quarter, mid quarter applies. Diana's deduction is computed as follows: 100% additional first-year depreciation: ($65,000 × 100%) = $65,000. Since the cost of the asset is reduced by the additional depreciation, there is no remaining depreciable balance left for MACRS depreciation ($65,000 - $65,000).

On October 1, 2019, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 to goodwill. If required, round your answer to the nearest dollar.The 2019 § 197 amortization deduction is $

Answer: $7,250. Taxpayers can claim an amortization deduction on intangible assets called "amortizable § 197 intangibles." The amount of the deduction is determined by amortizing the adjusted basis of such intangibles ratably over a 15-year period beginning in the month in which the intangible is acquired. An amortizable § 197 intangible is any § 197 intangible acquired after August 10, 1993, and held in connection with the conduct of a trade or business or for the production of income. Section 197 intangibles include goodwill and going-concern value, franchises, trademarks, and trade names. Covenants not to compete, copyrights, and patents also are included if they are acquired in connection with the acquisition of a business. Generally, self-created intangibles are not § 197 intangibles. The 15-year amortization period applies regardless of the actual useful life of an amortizable § 197 intangible. No other depreciation or amortization deduction is permitted with respect to any amortizable § 197 intangible except those permitted under the 15-year amortization rules.The 2019 § 197 amortization deduction of $7,250 ($1,000 + $6,250) is computed as follows: Patent: $60,000 /15 years = $4,000 x 3/12 = $1,000. Goodwill: $375,000 /15 years = $25,000 x 3/12 = $6,250.

Amir, who files single, has AGI of $58,000 and incurred the following itemized deductions this year: Union dues and work uniforms: $350 Home office expenses: $1,200 Unreimbursed employee expenses: $415 Gambling losses to the extent of gambling winnings: $890. What is Amir's total itemized deduction related to these items? $_______

Answer: $890. Amir may deduct $890. All of the expenses other than the gambling loss are miscellaneous itemized deductions (and cannot be deducted from 2018 through 2025). The gambling loss remains deductible.

In 2019, Britt drove her automobile 16,200 miles for business. She incurred $900 in gas expenses and $235 in tolls associated with the business mileage. Assuming Britt uses the standard mileage method, her deduction is $_______

Answer: $9,631.Also called the automatic mileage method, the standard mileage method is convenient in that it simplifies record keeping. The rate allowed per mile takes into account average operating expenses (such as gas and oil, repairs, and depreciation). Consequently, the taxpayer only has to multiply the automatic mileage rate by the miles driven to compute the deduction for business transportation. For 2019, the deduction is based on 58 cents per mile for business miles. Parking fees and tolls are allowed in addition to expenses computed using the automatic mileage method. Therefore Britt's deduction is $9,631 [16,200 miles x .58 = $9,396 + $235 (tolls)].

Complete the following statement regarding the reporting of cost recovery deductions. If depreciation is claimed, it should be supported by completing Form_______.

Answer: Form 4562. If depreciation is claimed, it should be supported by completing Form 4562. The amount listed on line 22 of Form 4562 is transferred to the appropriate line on Schedule C, F, or E, depending on the taxpayer's type of business.

In the current year, Chastain takes a trip from Charleston, South Carolina to France primarily for business purposes. He is away from home from March 5 through March 16. He spends four days vacationing and eight days (including two travel days) conducting business. His airfare is $2,900, his meals amount to $180 per day, and lodging and incidental expenses are $420 per day. He is self-employed. In your computations, round any division to two decimal places and use rounded amounts in subsequent calculations. Chastain's deductible expenses are:Plane and taxi expenses: $_____Lodging and incidental expenses: $_____Meals: $_____

Answers: $1,943; $3,360; $720. In order to limit the possibility of a taxpayer claiming a tax deduction for what is essentially a personal vacation, several provisions have been enacted to govern deductions associated with combined business and pleasure trips. When the trip is outside the United States, special rules apply. Transportation expenses must be allocated between business and personal unless (1) the taxpayer is away from home for seven days or less or (2) less than 25 percent of the time was for personal purposes. No allocation is required if the taxpayer has no substantial control over arrangements for the trip or the desire for a vacation is not a major factor in taking the trip. If the trip is primarily for pleasure, no transportation charges are deductible. Days devoted to travel are considered business days. Weekends, legal holidays, and intervening days are considered business days, provided both the preceding and succeeding days were business days. Meals are subject to the 50% cut back adjustment. Because Chastain is away from home for more than seven days (12 days) and more than 25% of his time (33%) is devoted to personal purposes, only 67% (8 business days / 12 days total) of the transportation is deductible. His deductions are as follows:Plane and taxi expenses: These are considered transportation expenses. Computation: (67% x $2,900) = $1,943. Lodging and incidental expenses: The deduction is limited to business days. Computation: (8 days x $420) = $3,360. Meals: The deduction is limited to business days and the 50% cutback. Computation: (8 days x $180) = $1,440 x 50% cutback for meals = $720.

Andre acquired a computer on March 3, 2019, for $2,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. His cost recovery deduction for the computer is $_____ for 2019 and $_____ for 2020.

Answers: $280; $560. MACRS provides separate cost recovery tables for realty and personalty. Cost recovery allowances for real property, other than land, are based on recovery lives specified in the law. The IRS provides tables that specify cost recovery allowances for personalty and for realty. Although MACRS requires straight-line depreciation for all eligible real estate, the taxpayer may elect to use the straight-line method for depreciable personal property. The property is depreciated using the class life (recovery period) of the asset with a half-year convention or a mid-quarter convention, whichever applies. The election is available on a class-by-class and year-by-year basis. The percentages for the straight-line election with a half-year convention appear in Exhibit 8.7 - Depreciation Table. For 2019: $2,800 x 10% (Exhibit 8.7) = $280. For 2020: $2,800 x 20% (Exhibit 8.7) = $560.

Hamlet acquires a 7-year class asset on November 23, 2019, for $100,000. Hamlet does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. Hamlet's cost recovery deduction is $______ for 2019 and $______ for 2020.

Answers: $3,570; $27,550. MACRS provides separate cost recovery tables for realty and personalty. Cost recovery allowances for real property, other than land, are based on recovery lives specified in the law. The IRS provides tables that specify cost recovery allowances for personalty and for realty. MACRS provides that the cost recovery basis of eligible personalty (and certain realty) is recovered over 3, 5, 7, 10, 15, or 20 years. MACRS views property as placed in service in the middle of the asset's first year (the half-year convention). The half-year convention arises from the simplifying presumption that assets generally are acquired at an even pace throughout the tax year. However, Congress was concerned that taxpayers might defeat that presumption by placing large amounts of property in service during the last quarter of the taxable year (and, by doing so, receive a half-year's depreciation on those large, fourth-quarter acquisitions). To inhibit this behavior, Congress added the mid-quarter convention that applies if more than 40 percent of the value of property other than eligible real estate is placed in service during the last quarter of the year. Under this convention, property acquisitions are grouped by the quarter they were acquired for cost recovery purposes. Acquisitions during the first quarter are allowed 10.5 months (three and one-half quarters) of cost recovery; the second quarter, 7.5 months (two and one-half quarters); the third quarter, 4.5 months (one and one-half quarters); and the fourth quarter, 1.5 months (one-half quarter). The percentages are shown in Exhibit 8.4 - Depreciation Table. To determine the amount of the cost recovery allowances, simply identify the asset by class and go to the appropriate table for the percentage. Mid-quarter convention prevails. Therefore, you must use the rates for the 4th quarter from the tables. 2019: $100,000 x .0357 (Exhibit 8.4) = $3,570 and for 2020: $100,000 x .2755 (Exhibit 8.4) = $27,550

Lopez acquired a building on June 1, 2014, for $1,000,000. Compute the depreciation expense assuming the building is classified as (a) residential rental real estate and (b) nonresidential real estate. Click here to access the depreciation table to use for this problem. a. If the building is classified as residential rental real estate, Lopez's cost recovery deduction is $______ for 2019. b. If the building is classified as nonresidential real estate, Lopez's cost recovery deduction is $______ for 2019.

Answers: $36,360; $25,640. MACRS provides separate cost recovery tables for realty and personalty. Cost recovery allowances for real property, other than land, are based on recovery lives specified in the law. The IRS provides tables that specify cost recovery allowances for personalty and for realty. Under MACRS, the cost recovery period for residential rental real estate is 27.5 years, and the straight-line method is used for computing the cost recovery allowance. Residential rental real estate includes property where 80 percent or more of the gross rental revenues are from nontransient dwelling units (e.g., an apartment building). Hotels, motels, and similar establishments are not residential rental property. Low-income housing is classified as residential rental real estate. Nonresidential real estate uses a recovery period of 39 years; it also is depreciated using the straight-line method. Land improvements are in the 15-year MACRS class. All eligible real estate is depreciated using the mid-month convention. Regardless of when the property is placed in service, it is deemed to have been placed in service at the middle of the month. This allows for one-half month's cost recovery for the month the property is placed in service. If the property is disposed of before the end of the recovery period, one-half month's cost recovery is permitted for the month of disposition regardless of the specific date of disposition. Cost recovery is computed by multiplying the applicable rate by the cost recovery basis. a. Residential rental real estate: $1,000,000 x .03636 (Exhibit 8.8) = $36,360. b. Nonresidential rental real estate: $1,000,000 x .02564 (Exhibit 8.8) = $25,640.

On April 5, 2019, Kinsey places in service a new automobile that cost $36,000. He does not elect § 179 expensing, and he elects not to take any available additional first-year depreciation. The car is used 70% for business and 30% for personal use in each tax year. Kinsey chooses the MACRS 200% declining-balance method of cost recovery (the auto is a 5-year asset). Click here to access the depreciation table to use for this problem. Assume the following luxury automobile limitations: year 1: $10,000; year 2: $16,000. Compute the total depreciation allowed for: 2019:$______ 2020:$______

Answers: $5,040; $8,064. The law places special limitations on cost recovery deductions for passenger automobiles. These statutory dollar limits were imposed on passenger automobiles because of the belief that the tax system was being used to underwrite automobiles whose cost and luxury far exceeded what was needed for the taxpayer's business use. A passenger automobile is any four-wheeled vehicle manufactured for use on public streets, roads, and highways with an unloaded gross vehicle weight (GVW) rating of 6,000 pounds or less. This definition specifically excludes vehicles used directly in the business of transporting people or property for compensation, such as taxicabs, ambulances, hearses, and trucks and vans as prescribed by the Regulations. The luxury auto limits are imposed before any percentage reduction for personal use. In addition, the limitation in the first year includes any amount the taxpayer elects to expense under § 179. If the passenger automobile is used partly for personal use, the personal use percentage is ignored for the purpose of determining the unrecovered cost available for deduction in later years. The cost recovery limitations are maximum amounts. If the regular MACRS calculation produces a lesser amount of cost recovery, the lesser amount is used.

In terms of tax consequences, employment status makes a great deal of difference to the persons who perform the services. Expenses of self-employed taxpayers, to the extent allowable, are classified as _______Unreimbursed employee expenses are________

Answers: deductions for AGI; nondeductible. In terms of tax consequences, employment status makes a great deal of difference to the persons who perform the services. For their part, independent contractors are more likely than employees to have unreimbursed business expenses, a significant investment in tools and work facilities, and less permanency in their business relationships. Independent contractors, moreover, anticipate a profit from their work, make their services available to the relevant marketplace, and are paid a flat fee on a per-job basis. Expenses of self-employed taxpayers, to the extent allowable, are classified as deductions for AGI and are reported on Schedule C (Profit or Loss From Business) of Form 1040. Employee business expenses are miscellaneous itemized deductions. The deduction for miscellaneous itemized deductions has been suspended from 2018 through 2025.

"For his business, McKenzie purchased qualifying equipment that cost $212,000 in 2019. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. If an amount is zero, enter ""0"". a. McKenzie's § 179 expense deduction is $_____ for 2019. His § 179 carryover to 2020 is $______ b. How would your answer change if McKenzie decided to use additional first-year (bonus) depreciation on the equipment?

Answers: $5,600; $206,400; $0; $0. Section 179 (Election to Expense Certain Depreciable Business Assets) permits the taxpayer to elect to write off up to $1,020,000 of the acquisition cost of tangible personal property used in a trade or business. Amounts that are expensed under § 179 may not be capitalized and depreciated. The § 179 expensing election is an annual election that applies to the acquisition cost of property placed in service that year. The immediate expense election generally is not available for real property or for property used for the production of income. Any elected § 179 expense is taken before additional first-year depreciation is computed. The base for calculating the remaining standard MACRS deduction is net of the § 179 expense and any additional first-year depreciation. Two additional limitations apply to the amount deductible under § 179. First, the ceiling amount on the deduction is reduced dollar for dollar when § 179 property placed in service during the taxable year exceeds a maximum amount ($2,550,000 in 2019). Second, the § 179 deduction cannot exceed the taxpayer's trade or business taxable income, computed without regard to the § 179 amount. Any § 179 amount in excess of taxable income is carried forward to future taxable years and added to other amounts eligible for expensing. The § 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1) the statutory dollar amount ($1,020,000) reduced by the cost of § 179 property placed in service in excess of $2,550,000 in the carryforward year or (2) business taxable income in the carryforward year. Taxpayers are allowed to deduct 100 percent cost recovery in the year qualified property is placed in service. The term qualified property includes most depreciable assets other than buildings with a recovery period of 20 years or less. This bonus depreciation applies to both new and used property (prior law restricted bonus depreciation to new property). The additional first-year depreciation is taken in the year in which the qualifying property is placed in service.

McKenzie's § 179 expense deduction is $_____ for 2019. His § 179 carryover to 2020 is $_____"

Xavier Corporation begins business on March 1, 2019. The corporation incurs start-up expenditures of $38,000. Round your final answers to the nearest dollar. a. If Xavier elects amortization under § 195, the total start-up expenditures that Xavier may deduct in 2019 is $ b. Assume the same facts except the start-up costs totaled $52,000.The total start-up expenditures that Xavier may deduct in 2019 is $

Answers: $6,833; $5,722. Start-up expenditures are partially amortizable, by using a § 195 election. A taxpayer must make this election no later than the due date of the return for the taxable year in which the trade or business begins. If no election is made, the start-up expenditures are capitalized. The amortization election for start-up expenditures allows the taxpayer to deduct the lesser of (1) the amount of start-up expenditures with respect to the trade or business or (2) $5,000, reduced, but not below zero, by the amount by which the start-up expenditures exceed $50,000. Any start-up expenditures not deducted are amortized ratably over a 180-month period, beginning in the month in which the trade or business begins. Amortizable start-up expenditures generally must satisfy two requirements. First, the expenditures must be paid or incurred in connection with: (a) The creation of an active trade or business, (b) The investigation of the creation or acquisition of an active trade or business, or (c) Any activity engaged in for profit in anticipation of such activity becoming an active trade or business. Second, the expenditures must involve costs that the taxpayer could deduct if they were paid or incurred to operate a business currently in existence (in the same field that the taxpayer is entering).

On February 17, 2019, Brecken places in service an automobile that cost $23,000. Assume Brecken does not claim the additional first-year or any § 179 deduction. The auto is used 35% for business and 65% for personal use. Assume the luxury automobile limitations for Year 1 is $10,000. Compute the total depreciation allowed for 2019: $_____ and Assume that the automobile cost $45,000. Compute the total depreciation allowed for 2019: $______

Answers: $805; $1,575. The law places special limitations on cost recovery deductions for passenger automobiles. These statutory dollar limits were imposed on passenger automobiles because of the belief that the tax system was being used to underwrite automobiles whose cost and luxury far exceeded what was needed for the taxpayer's business use. For automobiles and other listed property not used predominantly in business in the year of acquisition (i.e., 50 percent or less), the straight-line method under the alternative depreciation system is required. Under this system, the straight-line recovery period for automobiles is five years. However, the cost recovery allowance for any passenger automobile cannot exceed the luxury auto amount. The straight-line method is used even if, at some later date, the business usage of the property increases to more than 50 percent. In that case, the amount of cost recovery reflects the increase in business usage.

In the current year, Joselyn travels from Houston, Texas to Miami, Florida primarily for business. She spends three days conducting business and two days sightseeing (the day before and the day after business). Her plane and taxi fare amounts to $890. Her meals amount to $160 per day, and lodging and incidental expenses are $275 per day. She is self-employed. Her deduction for these expenses is as follows: Plane and taxi expenses: $_____ Meals:$____ Lodging and incidental expenses: $______

Answers: $890; $240; $825. In order to limit the possibility of a taxpayer claiming a tax deduction for what is essentially a personal vacation, several provisions have been enacted to govern deductions associated with combined business and pleasure trips. If the business / pleasure trip is from one point in the United States to another point in the United States, the transportation expenses are deductible only if the trip is primarily for business. Meals, lodging, and other expenses are allocated between business and personal days. If the trip is primarily for pleasure, no transportation expenses qualify as a deduction. In addition, meals are subject to the 50% cut back adjustment. Plane and taxi expenses: She can deduct the transportation charges of $890, because the trip is primarily for business (three days of business versus two days of sightseeing). Meals: Her meals are limited to the three business days and are subject to the 50% cutback, for a total of $240 [3 days x ($160 x 50%)]. Lodging and incidental expenses: Although these expenses are not subject to the 50% cutback, they are limited to her three business days or $825 (3 days x $275).

Complete the statements below regarding Section 222. Under § 222, a deduction for AGI is allowed for qualified tuition and related expenses involving higher education (i.e., postsecondary). The deduction is the lesser of the qualifying amount spent or the maximum amount allowed by § 222. What is the maximum amount allowed for a single taxpayer with the following MAGI? If an amount is zero, enter "0". MAGI of $90,000: $___ MAGI of $68,000: $_____ MAGI of $45,000: $______

Answers: for; lesser; $0; $2,000; $4,000.One of the major shortcomings of the education deduction is that it is unavailable for taxpayers obtaining a basic skill (i.e., to meet the minimum standards required for the taxpayer's current job). This shortcoming has been partly resolved with the deduction for qualified tuition and related expenses. A deduction for AGI is allowed for qualified tuition and related expenses involving higher education (i.e., postsecondary). The deduction is the lesser of the qualifying amount spent or the maximum amount allowed by § 222. The maximum deductions allowed are shown in Exhibit 9.1. Per Table 9.1, the limitations are based on the taxpayer's MAGI and filing status. A phaseout is provided containing two steps ($65,000/$80,000 for single and $130,000/$160,000 for married) in which the benefit of § 222 disappears completely after the second step. Thus, a married couple with MAGI of $160,000 would lose the entire deduction if they earned an additional $1. Therefore, for a single taxpayer with MAGI of $90,000, the amount allowed is $0 (since exceeds $80,000). If the taxpayer has MAGI of $68,000, the amount allowed is $2,000. However, if the MAGI is only $45,000, the taxpayer is allowed $4,000.

Qualified improvement property __________leasehold improvements. Therefore, leasehold improvements are recovered over a_________using the_________.

Answers: includes; 15 year life; half-year convention. Nonresidential realty has a 39-year life, and any improvements made to this property would normally have a 39-year life. An exception to this general rule is provided for qualified improvement property. Qualified improvement property is recovered over a 15-year life using the half-year convention and the straight-line method. Qualified improvement property is any improvement to an interior portion of nonresidential real property made after the property is placed in service, including leasehold improvements. However, it does not include the costs of an elevator or escalator or improvements that enlarge a building or modify its internal framework.

Complete the following statements regarding the alternative depreciation system. In general, ADS depreciation is computed using ______ recovery method. However, for purposes of the AMT, depreciation of personal property is computed using the ________ method with an appropriate switch to the ________ method. The taxpayer must use the ________ convention, whichever is applicable, for all property other than eligible real estate. The ________ convention is used for eligible real estate.

Complete the following statements regarding the alternative depreciation system. In general, ADS depreciation is computed using straight-line recovery method. However, for purposes of the AMT, depreciation of personal property is computed using the 150 percent declining-balance method with an appropriate switch to the straight-line method. The taxpayer must use the half-year or the mid-quarter convention, whichever is applicable, for all property other than eligible real estate. The mid-month convention is used for eligible real estate.

Atalia purchased used seven-year class property at a cost of $300,000 on April 15, 2019. Atalia's cost recovery deduction for 2019 for alternative minimum tax purposes, assuming she does not elect § 179, would be $32,130.

Correct. Atalia's cost recovery deduction for 2019 for AMT purposes assuming she does not elect § 179 immediate expense is $32,130 (0.1071 × $300,000).

T/F : Computer or peripheral equipment placed in service after December 31, 2017, is listed property.

FALSE. Computer or peripheral equipment placed in service after December 31, 2017, is not listed property. Previously, it was listed property.

29. On July 1, 2015, Rex purchases a new automobile for $40,000. He uses the car 80% for business and drives the car as follows: 8,000 miles in 2015, 19,000 miles in 2016, 20,000 miles in 2017, and 15,000 miles in 2018. Determine Rex's basis in the business portion of the auto as of January 1, 2019, under the following assumptions: b. Rex uses the actual cost method. [Assume that no § 179 expensing is claimed and that 200% declining-balance cost recovery with the half-year convention is used—see Chapter 8. The recovery limitation for an auto placed in service in 2015 is as follows: $3,160 (first year), $5,100 (second year), $3,050 (third year), and $1,875 (fourth year).]

Depreciable business basis ($40,000 × 80%) $32,000 Less depreciation (allowed under actual operating cost method—see below*) (10,548) Adjusted business basis of auto on 1/1/19 $21,452 *Depreciation allowed is the lesser of the MACRS amount (see Exhibit 8.3) or the recovery limitation (see table on p. 8-19). Depreciation Year MACRS Amount Recovery Limitation* Year MACRS Amount Recovery Limitation* Depreciation Allowed 2015 $40,000 × 20% × 80% = $6,400 $3,160 × 80% = $2,528 $ 2,528 2016 $40,000 × 32% × 80% = $10,240 $5,100 × 80% = $4,080 4,080 2017 $40,000 × 19.2% × 80% = $6,144 $3,050 × 80% = $2,440 2,440 2018 $40,000 × 11.52% × 80% = $3,686 $1,875 × 80% = $1,500 1,500 Total depreciation allowed $10,548

When contributions are made to a Roth IRA, they are deductible by the participant. Later distributions from the IRA, however, are not taxed.

FALSE No tax benefit (i.e., exclusion or deduction) results from the initial contribution to a Roth IRA. Instead, later distributions (including postcontribution earnings) are recovered tax-free.

Eric just graduated from college. The cost of moving his personal belongings to his first job site qualifies for the moving expense deduction.

FALSE The TCJA of 2017 suspended the moving deduction. Only active duty Armed Forces members may take this deduction.

A self-employed accountant's education costs to obtain a law degree are deductible.

FALSE The education constitutes training for a new trade or business, which is not deductible.

A nonaccountable plan is where an adequate accounting or return of excess amounts, or both, is not required. All expense reimbursements are not included as wages.

FALSE. A nonaccountable plan is where an employer does not require an adequate accounting or return of excess amounts (or both) of employees. Accordingly, all expense reimbursements must be included as wages on the employee's Form W-2.

CPA exam review course fees are deductible

FALSE. Fees incurred for professional qualification exams (e.g., the bar exam) and fees for review courses (such as a CPA review course) are not deductible.

When contributions are made to a Roth IRA, they are deductible by the participant. Later distributions from the IRA, however, are not taxed.

FALSE. No tax benefit (i.e., exclusion or deduction) results from the initial contribution to a Roth IRA. Instead, later distributions (including postcontribution earnings) are recovered tax-free.

Use of the standard Federal per diem rates for meals and incidental expenses constitutes an adequate accounting and no other records need be maintained?

FALSE. The place, date, business purpose of the expense, and the business relationship of the parties involved must also be kept.

Richard, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is deductible.

FALSE. Expenses by an accountant to obtain a law degree are not deductible. The § 222 deduction expired on December 31, 2017.

After graduating from college, Frank obtains a job as a sales representative. Frank's job search expenses qualify as deductions.

FALSE. Miscellaneous itemized deductions including the expenses of job hunting subject to the 2%-of-AGI floor are not deductible.

T/F: Taxpayers may not elect to use the straight-line method under MACRS for personalty.

FALSE. Straight-line can be elected as one of the choices for cost recovery under MACRS. If straight-line is elected, the property is depreciated using the MACRS life of the asset with a half-year convention or a mid-quarter convention, whichever applies.

A self-employed taxpayer who uses the automatic mileage method to compute his or her business auto expenses cannot deduct the business portion of tolls and parking.

FALSE. Such costs are deductible under both methods (actual and mileage method).

A temporary assignment when determining the taxpayer's tax home can exceed one year.

FALSE. Code § 162(a) states that a taxpayer "shall not be treated as temporarily away from home during any period of employment if such period exceeds 1 year."

Richard, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is deductible?

FALSE. Expenses by an accountant to obtain a law degree are not deductible. The § 222 deduction expired on December 31, 2017.

T/F: In determining the percentage of business use of listed property other than automobiles, one employs the most appropriate unit of time for which the property is available for use.

FALSE. One employs the most appropriate unit of time for which the property is actually used (rather than its availability for use).

Commuting between home and one's place of employment is deductible?

FALSE/ Commuting between home and one's place of employment is a personal, nondeductible expense. The fact that one employee drives 30 miles to work and another employee walks six blocks to work does not matter.

Cost depletion is determined by multiplying the depletion cost per unit by the number of units produced.

False. Correct. Cost depletion is similar to cost of goods sold, as it is determined by multiplying the depletion cost per unit by the number of units sold, not the number of units produced.

Listed property includes any computer or peripheral equipment, with the exception of equipment used exclusively at a regular business establishment, including a qualifying home office.

False. A computer or peripheral equipment placed in service after 2017 is not listed property.

If the business usage of the listed property drops below the more-than-50 percent level, no depreciation deduction is allowed for the property.

False. After the business usage of the listed property drops below the more-than-50 percent level, the straight-line method is used for the remaining life of the property.

Business gifts are subject to the 50 percent cut-back adjustment.

False. Although not subject to a cutback adjustment, business gifts are deductible only to the extent of $25 per donee per year.

Taxpayers can choose the actual cost or standard mileage method for transportation expenses. However, once a method is chosen, a change later is not allowed.

False. Because the automatic (standard) mileage allowance often is modest in amount, a new, expensive automobile used primarily for business may generate a higher expense based on actual cost. Once a method is chosen, a later change may be possible. Conversion from the automatic mileage method to the actual cost method is allowed if a basis adjustment is made for depreciation deemed taken. Conversion from the actual cost method to the automatic mileage method is possible only if the taxpayer has not used the MACRS statutory percentage method or claimed § 179 limited expensing.

Usually commuting between home and one's place of employment is a business, deductible expense.

False. Commuting between home and one's place of employment is a personal, nondeductible expense. The rule that disallows a deduction for commuting expenses has several exceptions. For example, an employee who uses an automobile to transport heavy tools to work and who otherwise would not drive to work is allowed a deduction, but only for the additional costs incurred to transport the work implements.

Personal use property is only personalty property (personal property) that is held for personal use rather than for use in a trade or business or an income-producing activity.

False. Do not confuse personalty (or personal property) with personal use property. Personal use property is any property (realty or personalty) that is held for personal use rather than for use in a trade or business or an income-producing activity. Cost recovery deductions are not allowed for personal use assets.

For listed property to be considered as predominantly used in business, its business usage must exceed 80 percent.

False. For listed property to be considered as predominantly used in business, its business usage must exceed 50 percent.

The use of listed property for production of income does qualify as business use for purposes of the more-than-50 percent test.

False. For listed property to be considered as predominantly used in business, its business usage must exceed 50 percent. The use of listed property for production of income does not qualify as business use for purposes of the more-than-50 percent test. However, both production of income and business use percentages are used to compute the cost recovery deduction.

The annual limitation on business gifts can be circumvented by having the donor's spouse join in the gift.

False. The $25 limitation on business gifts cannot be circumvented by having the donor's spouse join in the gift or by making multiple gifts that include the customer's family.

"An employee may deduct unreimbursed employment-related transportation expenses as an itemized deduction for AGI."

False. The Tax Cuts and Jobs Act (TCJA) of 2017 made a significant change in this area by suspending the deduction for miscellaneous itemized deductions (including unreimbursed employee business expenses) from 2018 through 2025. As a result, the only employee business expenses that are currently deductible are those that are reimbursed by an employer (and these expenses, once reimbursed, have no effect on an employee's taxable income).

The key date for the commencement of depreciation is the date an asset is purchased.

False. The key date for the commencement of depreciation is the date an asset is placed in service. This date, and not the purchase date of an asset, is relevant. This distinction is particularly important for an asset that is purchased near the end of the tax year, but not placed in service until after the beginning of the following tax year.

When a business is purchased, only goodwill is subject to a statutory amortization period of 15 years. Therefore, the purchaser should attempt to have part of the purchase price assigned to a covenant not to complete rather than to goodwill.

False. When a business is purchased, goodwill and covenants not to compete are both subject to a statutory amortization period of 15 years. Therefore, the purchaser does not derive any tax benefits when part of the purchase price is assigned to a covenant rather than to goodwill. Thus, from the purchaser's perspective, bargaining for a covenant should be based on legal rather than tax reasons. Because the amortization period for both goodwill and a covenant is 15 years, the purchaser may want to attempt to minimize these amounts if the purchase price can be assigned to assets with shorter lives (e.g., inventory, receivables, and personalty). Conversely, the purchaser may want to attempt to maximize these amounts if part of the purchase price will otherwise be assigned to assets with longer recovery periods (e.g., realty) or to assets not eligible for cost recovery (e.g., land).

In 2019, Meghann Carlson, a single taxpayer, has QBI of $110,000 and modified taxable income of $78,000 (this is also her taxable income before the QBI deduction). Given this information, what is Meghann's QBI deduction? Meghann's QBI deduction is $

Meghann's QBI deduction is $ 15,600

The employer pays for services based on task performed rather than the time.

A taxpayer who claims the standard deduction will not be able to deduct any miscellaneous itemized deductions.

TRUE A taxpayer who claims the standard deduction will not be itemizing deductions. They are mutually exclusive approaches to the deduction.

A taxpayer who claims the standard deduction may be able to claim an office in the home deduction.

TRUE The office in the home deduction will be allowed if the taxpayer is self-employed.

Every year, Fern Corporation gives each employee a turkey and a cake at Christmas. These gifts are not subject to the 50% rule.

TRUE These gifts meet the de minimis fringe benefit rule and are therefore not subject to the 50% rule.

Tired of her 60-mile daily commute, Lilly purchases a condo that is only five miles from her job. Lilly's moving expenses to her new condo are disallowed and cannot be claimed by her as a deduction.

TRUE Moving expenses are only deductible by active duty Armed Forces members.

Tyler, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is not deductible.

TRUE \Expenses incurred by a self-employed accountant to obtain a law degree are not deductible. The § 222 deduction expired on December 31, 2017, but it may be extended by Congress

By itself, a credit card receipt will not constitute adequate substantiation for travel expenses.

TRUE. Credit card receipts establish the date, place, and amount of the expenditure. Because neither the business relationship nor the business purpose is established, the deduction is disallowed.

After graduating from college with a degree in geophysics, Bob obtains a job as a geologist with ExxonMobil. Bob's job search expenses do not qualify as deductions.

TRUE. Miscellaneous itemized deductions such as the expenses of job hunting, subject to the 2%-of-AGI floor, are not deductible.

Individuals may deduct 20% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

TRUE. Section 199A permits individuals to deduct 20% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

Taxpayers may not elect straight-line depreciation under ADS.

TRUE. Taxpayers may elect straight-line depreciation under ADS. One reason is that marginal tax rates may be higher in future years, deferring cost recovery to later years

Taxpayers may elect to use the 150% declining-balance method of depreciation under ADS.

TRUE. Taxpayers may elect to use the 150% declining-balance method of depreciation under ADS. If this election is made, there is no difference between the regular income tax and AMT cost recovery.

Valley Corporation pays for a trip to Barbados for its top two salespersons. This expense is not subject to the 50% rule.

TRUE. The cost of the trips to Barbados is additional compensation to the employees involved. Consequently, it is not subject to the cutback adjustment and is fully deductible by Valley Corporation. It is also taxed as income to the employees.

If a taxpayer does not own a home but rents an apartment, the office in the home deduction is still available.

TRUE. The only difference would be a substitution of rent expense for depreciation. Otherwise, the deduction is equally available.

One indication of employee (rather than independent contractor) status is when the individual performing the services is paid based on time spent (rather than tasks performed).

TRUE. This describes a criterion for employee classification rather than independent contractor classification. Independent contractors anticipate a profit from their work, make their services available to the relevant marketplace, and are likely to be paid a flat fee on a per-job basis.

T/F: Gary makes his living as a driver for Uber. For tax purposes, his car is not considered a passenger automobile.

The definition of passenger automobile specifically excludes vehicles used directly in the business of transporting people or property for compensation, such as taxicabs (including autos used for Uber or Lyft).

Total square footage of the home office 200 Amount allowed per square foot X $ 5 Total home office expense $ 1,000

The exclusive use requirement means that part of the home must be used solely for business purposes.

True. An exception allows mixed use (both business and personal) of the home if a licensed day-care business is involved.

An exception to the annual gift per donee limitation is made for gifts costing $4 or less or promotional materials.

True. An exception is made for gifts costing $4 or less (e.g., pens with the employee's or company's name on them) or promotional materials. Such items are not treated as business gifts subject to the $25 limitation. In addition, incidental costs such as engraving of jewelry and nominal charges for gift-wrapping, mailing, and delivery are not included in the cost of the gift in applying the limitation.

Assets used in a trade or business or for the production of income are eligible for cost recovery if they are subject to wear and tear, decay or decline from natural causes, or obsolescence.

True. Assets that do not decline in value on a predictable basis or that do not have a determinable useful life (e.g., land, stock, and antiques) are not eligible for cost recovery.

In determining the percentage of business usage for listed property, a mileage-based percentage is used for automobiles.

True. For other listed property, one employs the most appropriate unit of time (e.g., hours) for which the property actually is used (rather than its availability for use).

From an employer's perspective, classifying workers as independent contractors rather than as employees avoids payroll taxes and income tax withholdings.

True. From an employer's perspective there are many reasons to favor classifying workers as independent contractors rather than as employees. Besides avoiding payroll taxes and income tax withholdings the employer circumvents a myriad of state and local laws. Examples include vacation pay obligations, unemployment tax and workers' compensation requirements, and overtime and minimum wage restrictions. Because complying with these rules is costly and burdensome, many employers are motivated to misclassify their workers as independent contractors.

Gifts to superiors are not deductible.

True. Gifts to superiors and employers are not deductible.

If listed property is subject to cost recovery recapture, the amount required to be recaptured and included in the taxpayer's ordinary income is the excess cost recovery.

True. If the business use percentage of listed property falls to 50 percent or less after the year the property is placed in service, the property is subject to cost recovery recapture. The amount required to be recaptured and included in the taxpayer's ordinary income is the excess cost recovery. Excess cost recovery is the excess of the cost recovery deduction taken in prior years using the statutory percentage method over the amount that would have been allowed if the straight-line method had been used since the property was placed in service.

The employee must be away from home for a temporary period.

True. If the taxpayer-employee is reassigned to a new post for an indefinite period of time, that new post becomes his or her tax home. Temporary indicates that the assignment's termination is expected within a reasonably short period of time.

The luxury auto limits are imposed before any percentage reduction for personal use.

True. In addition, the limitation in the first year includes any amount the taxpayer elects to expense under § 179. If the passenger automobile is used partly for personal use, the personal use percentage is ignored for the purpose of determining the unrecovered cost available for deduction in later years.

If the taxpayer fails to elect to expense IDCs on the original timely filed return for the first year in which such expenditures are incurred, an irrevocable election to capitalize them has been made.

True. Once made, the election is binding on both the taxpayer and the IRS for all such expenditures in the future. If the taxpayer fails to elect to expense IDCs on the original timely filed return for the first year in which such expenditures are incurred, an irrevocable election to capitalize them has been made.

Most pension plans allow an exclusion for the contributions the employee makes to the plan.

True. Pension plans covering employees follow one of two income tax approaches. Most plans allow an exclusion for the contributions the employee makes to the plan. The employee's income tax return shows nothing regarding the contribution—no income, exclusion, or deduction.

Realty (real property) generally includes land and buildings permanently affixed to the land.

True. Property includes both realty (real property) and personalty (personal property). Realty generally includes land and buildings permanently affixed to the land. Personalty is defined as any asset that is not realty.

The home office may be where the taxpayer meets clients, patients, or customers.

True. See requirements above.

Self-employed taxpayers can also participate in retirement plans known as Keogh (or H.R. 10) plans.

True. Self-employed taxpayers can also participate in retirement plans with tax-favored benefits. Known as Keogh (or H.R. 10) plans, these arrangements follow the deduction approach of traditional IRAs. The amount contributed under a plan is a deduction for AGI.

Transportation expenses include only the cost of transporting the employee from one place to another in the course of employment when the employee is not away from home in travel status.

True. Such costs include taxi fares, automobile expenses, tolls, and parking.

"The expenses were incurred to meet the express requirements of the employer or the requirements imposed by law to retain his or her employment status."

True. Taxpayers are permitted to deduct education expenses if additional courses are required by the employer or are imposed by law. For example, many states require a minimum of a bachelor's degree and a specified number of additional courses to retain a teaching job.

Generally, the accompaniment by the spouse or dependent must serve a bona fide business purpose, and the expenses must be otherwise deductible.

True. The Code places stringent restrictions on the deductibility of travel expenses of the taxpayer's spouse or dependent.

The basis of cost recovery property is reduced by the cost recovery allowed, and by not less than the allowable amount.

True. The allowed cost recovery is the cost recovery actually deducted, whereas the allowable cost recovery is the amount that could have been taken under the applicable cost recovery method. If the taxpayer does not claim any cost recovery on property during a particular year, the basis of the property still is reduced by the amount of cost recovery that should have been deducted (the allowable cost recovery).

The deduction is available for a taxpayer's spouse or anyone who can be claimed as a dependent and is an eligible student.

True. The deduction is not available for married persons who file separate returns.

A taxpayer who leases a passenger automobile reports an inclusion amount in gross income.

True. The inclusion amount is computed from an IRS table for each taxable year for which the taxpayer leases the automobile. The purpose of this provision is to prevent taxpayers from circumventing the luxury auto and other limitations by leasing, instead of purchasing, an automobile. The inclusion amount is based on the fair market value of the automobile; it is prorated for the number of days the auto is used during the taxable year. The prorated dollar amount then is multiplied by the business and income-producing usage percentage. The taxpayer deducts the lease payments, multiplied by the business and income-producing usage percentage.

A taxpayer may be able to avoid the mid-quarter convention by designating § 179 treatment for assets placed in service during the last quarter of the taxable year.

True. The mid-quarter convention generally results in smaller depreciation deductions in the asset's acquisition year. However, the basis of property used to determine whether the mid-quarter convention applies is derived after any § 179 immediate expense election. As a result, a taxpayer may be able to avoid the mid-quarter convention by designating § 179 treatment for assets placed in service during the last quarter of the taxable year

"Office in the home expenses are deductible if the residence is used exclusively on a regular basis as a principal place of business for any trade or business of the taxpayer."

True. The term principal place of business now includes a place of business that satisfies the following requirements: (1) The office is used by the taxpayer to conduct administrative or management activities of a trade or business. (2) There is no other fixed location of the trade or business where the taxpayer conducts these activities.

The law places special limitations on cost recovery deductions for passenger automobiles (any four-wheeled vehicle manufactured for use on public streets, roads, and highways with an unloaded gross vehicle weight rating of 6,000 pounds or less.)

True. This definition specifically excludes vehicles used directly in the business of transporting people or property for compensation, such as taxicabs, ambulances, hearses, and trucks and vans as prescribed by the Regulations.

Listed property is subject to the substantiation requirements of § 274.

True. This means that the taxpayer must prove for any business usage the amount of expense or use, the time and place of use, the business purpose for the use, and the business relationship to the taxpayer of persons using the property. Substantiation requires adequate records or sufficient evidence corroborating the taxpayer's statement.

Qualified tuition and related expenses include whatever is required for enrollment at the institution.

True. Usually, student activity fees, books, and room and board are not included.

Being self-employed carries the obvious advantage of a deduction for AGI category of job-related expenses.

True. When considering the merits of employee or independent contractor status, much depends on which party is involved. If it is the worker, being self-employed carries the obvious advantage of a deduction for AGI category of job-related expenses and the avoidance of the 2 percent limitation applicable to any unreimbursed excess. However, a self-employed individual may have other costs, such as local gross receipts taxes, license fees, franchise fees, personal property taxes, and occupation taxes

The employer furnishes tools or equipment and a place to work.

Yes

Tuition

Yes

"Books and supplies"

Yes.

"Meals and lodging while in travel status"

Yes.

The employer allows participation in various workplace fringe benefits.

Yes. Most persons classified as employees are common law employees. The common law employee classification originated in judicial case law and is summarized in various IRS pronouncements. Revenue Ruling 87-41, lists 20 factors that can be used in determining whether a worker is a common law employee or an independent contractor (and, thus, self-employed). A common law employee-employer relationship exists when the employer has the right to specify the end result and the ways and means by which that result is to be attained. An employee is subject to the will and control of the employer with respect not only to what shall be done but also to how it shall be done. If the individual is subject to the direction or control of another only to the extent of the end result but not as to the means of accomplishment, an employee-employer relationship does not exist. Certain factors indicate a common law employee-employer relationship. These include the performance of the following by the employer: Furnishing tools or equipment and a place to work. Providing support services, including the hiring of assistants to help do the work. Making training available to provide needed job skills. Allowing participation in various workplace fringe benefits (e.g., accident and health plans, group life insurance, and retirement plans). Paying for services based on time rather than the task performed.

Lara uses the standard mileage method for determining auto expenses. During 2019, she used her car as follows: 9,000 miles for business, 2,000 miles for personal use, 2,500 miles for a move to a new job, 1,000 miles for charitable purposes, and 500 miles for medical visits. Presuming that all the mileage expenses are allowable (i.e., not subject to percentage limitations), what is Lara's deduction for: a. Business?$ b. Charitable?$ c. Medical?$

a. Business?$ 5,220 b. Charitable?$ 140 c. Medical?$ 100

opez acquired a building on June 1, 2014, for $36,373,000. Compute the depreciation deduction assuming the building is classified as (a) residential and (b) non residential. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. a. Calculate Lopez's cost recovery deduction for 2019 if the building is classified as residential rental real estate.$ b. Calculate Lopez's cost recovery deduction for 2019 if the building is classified as nonresidential real estate.$

a. Calculate Lopez's cost recovery deduction for 2019 if the building is classified as residential rental real estate.$1,322,522 b. Calculate Lopez's cost recovery deduction for 2019 if the building is classified as nonresidential real estate.$932,604

Brenda, a self-employed taxpayer, travels from Chicago to Barcelona (Spain) on business. She is gone 10 days (including 2 days of travel) during which time she spends 5 days conducting business and 3 days sightseeing. Her expenses are $1,500 (airfare), $200 per day (meals), and $400 per night (lodging). Because Brenda stayed with relatives while sightseeing, she only paid for 5 nights of lodging. Compute Brenda's deductions for the following expenses. a. Deduction for airfare:$ b. Deduction for meals:$ c. Deduction for lodging:$

a. Deduction for airfare:$1,050 b. Deduction for meals:$700 c. Deduction for lodging:$2,000

Juan acquires a new 5-year class asset on March 14, 2019, for $200,000. This is the only asset Juan acquired during the year. He does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. On July 15, 2020, Juan sells the asset. Click here to access depreciation table to use for this problem. a. Determine Juan's cost recovery for 2019.$ b. Determine Juan's cost recovery for 2020.$

a. Determine Juan's cost recovery for 2019.$40,000 b. Determine Juan's cost recovery for 2020.$32,000

Kim works for a clothing manufacturer as a dress designer. During 2019, she travels to New York City to attend five days of fashion shows and then spends three days sightseeing. Her expenses are as follows: Airfare$1,500 Lodging (8 nights)1,920 Meals (8 days)1,440 Airport transportation 120 Assume lodging/meals are the same amount for the business and personal portion of the trip ($240 per day for lodging and $180 per day for meals). a. Determine Kim's business expenses, presuming no reimbursement. Airfare Lodging Meals Transportation Total$ What amount may she deduct on her tax return?$ b. Would the tax treatment of Kim's deduction differ if she was an independent contractor?The deductible expenses on her tax return would be $ and the expenses would be classified as a ____________ .

a. Determine Kim's business expenses, presuming no reimbursement. Airfare 1,500 Lodging 1,200 Meals 450 Transportation 120 Total$3,270 What amount may she deduct on her tax return?$ 0 b. Would the tax treatment of Kim's deduction differ if she was an independent contractor?The deductible expenses on her tax return would be $ 3,270 and the expenses would be classified as a deduction for AGI .

Orange Corporation acquired new office furniture on August 15, 2019, for $130,000. Orange does not elect immediate expensing under § 179. Orange claims any available additional first-year depreciation. If required, round your answer to the nearest dollar. Click here to access Exhibit 8.1 and the depreciation tables in the textbook. a. Determine Orange's cost recovery for 2019. The office furniture is classified as_________ class of property for MACRS.If bonus depreciation is elected, Orange's deduction is $ b. Determine Orange's cost recovery for 2019 if Orange decided to only use $52,000 of bonus depreciation and normal MACRS on the balance of the acquisition cost.

a. Determine Orange's cost recovery for 2019. The office furniture is classified as seven-year class of property for MACRS.If bonus depreciation is elected, Orange's deduction is $130,000 b. Determine Orange's cost recovery for 2019 if Orange decided to only use $52,000 of bonus depreciation and normal MACRS on the balance of the acquisition cost. 63,146

On May 5, 2019, Christy purchased and placed in service a hotel. The hotel cost $10,800,000, and the land cost $1,200,000 ($12,000,000 in total). Calculate Christy's cost recovery deductions for 2019 and 2029. If required, round your answers to the nearest dollar. Click here to access the depreciation table to use for this problem. a. How is the property classified for MACRS? b. What is the life of the asset for MACRS? c. Calculate Christy's cost recovery deductions for 2019 and 2029 2019: $2029: $

a. How is the property classified for MACRS?Nonresidential real estate b. What is the life of the asset for MACRS?39 years c. Calculate Christy's cost recovery deductions for 2019 and 2029. 2019: $173,340 2029: $276,912

Jackson, a self-employed taxpayer, uses his automobile 90% for business and during 2019 drove a total of 14,000 business miles. Information regarding his car expenses is listed below. Business parking$ 140 Auto insurance 1,300 Auto club dues (includes towing service)180 Toll road charges (business-related)200 Oil changes and engine tune-ups 210 Repairs 160 Depreciation allowable 2,850 Fines for traffic violations (incurred during business use) 320 Gasoline purchases 2,800 What is Jackson's deduction in 2019 for the use of his car if he uses: a. The actual cost method?$ b. The automatic mileage method?$ c. What records must Jackson maintain?Keeping a written or electronic log of miles driven, the dates the automobile was used, the location of travel, and the business purpose is enough evidence for the___________. If the ______________is used, keeping copies of receipts, canceled checks, and bills in addition to a mileage log is sufficient. Records and logs should be kept contemporaneously (e.g., updated weekly or daily).

a. The actual cost method?$7,090 b. The automatic mileage method?$8,460 c.What records must Jackson maintain?Keeping a written or electronic log of miles driven, the dates the automobile was used, the location of travel, and the business purpose is enough evidence for the standard rate method . If the actual expense method is used, keeping copies of receipts, canceled checks, and bills in addition to a mileage log is sufficient. Records and logs should be kept contemporaneously (e.g., updated weekly or daily).

On November 4, 2017, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2017 and 2018, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect; Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year assets). Blue should have taken $910 and $7,272 cost recovery in 2017 and 2018, respectively. On January 1, 2019, the asset was sold for $180,000. If required, round all computations to the nearest dollar. Click here to access the depreciation tables in the textbook. a. The adjusted basis of the asset at the end of 2018 is $. b. The cost recovery deduction for 2019 is $. c. The ___on the sale of the asset in 2019 is $

a. The adjusted basis of the asset at the end of 2018 is $.191,818 b. The cost recovery deduction for 2019 is $.303 c. The loss on the sale of the asset in 2019 is $11,515

On August 2, 2019, Wendy purchased a new office building for $3,800,000. On October 1, 2019, she began to rent out office space in the building. On July 15, 2023, Wendy sold the office building. If required, round your answers to the nearest dollar. Click here to access the depreciation table to use for this problem. a. What MACRS convention applies to the new office building? b. What is the life of the asset for MACRS? c. Determine Wendy's cost recovery deduction for 2019 and 2023.2019: $2023: $

a. What MACRS convention applies to the new office building?Mid-month b. What is the life of the asset for MACRS?39 years c. Determine Wendy's cost recovery deduction for 2019 and 2023.2019: $20,330 2023: $52,776

Melanie is employed full-time as an accountant for a national hardware chain. She recently started a private consulting practice, which provides tax advice and financial planning to the general public. For this purpose, she maintains an office in her home. Expenses relating to her home for 2019 are as follows: Real property taxes $3,600 Interest on home mortgage 3,800 Operating expenses of home 900 Melanie's residence cost $350,000 (excluding land) and has living space of 2,000 square feet, of which 20% (400 square feet) is devoted to business. The office was placed in service in February 2018, and under the Regular Method, Melanie had an unused office in the home deduction of $800 for 2018. Assume there is sufficient net income from her consulting practice. Click here to access the depreciation table. Round deprecation to the nearest dollar. a. What amount can Melanie claim this year for her office in the home deduction under the Regular Method?$ b. What is Melanie's office in the home deduction under the Simplified Method?$

a. What amount can Melanie claim this year for her office in the home deduction under the Regular Method?$4,255 Percentage of the home used for business is nonresidential 39 MACRS cost recovery. b. What is Melanie's office in the home deduction under the Simplified Method?$1,500

Christine is a full-time teacher of the fourth grade at Vireo Academy. During the current year, she spends $1,400 for classroom supplies. On the submission of adequate substantiation, Vireo reimburses her for $500 of these expenses—the maximum reimbursement allowed for supplies under school policy. [The reimbursement is not shown as income (Box 1) of Form W-2 given to Christine by Vireo.] a. What are the income tax consequence of the $1,400, if Christine chooses to itemize her deductions from AGI? She can claim the educator's deduction in the amount of $______, _________ and $______, is an employee business expense which is ___________. b. What are the income tax consequences of the $1,400, if Christine claims the standard deduction? She can claim the educator's deduction in the amount of $______, _________ AGI.

a. What are the income tax consequence of the $1,400, if Christine chooses to itemize her deductions from AGI?She can claim the educator's deduction in the amount of $250 for AGI and $650 is an employee business expense which is nondeductible . b. What are the income tax consequences of the $1,400, if Christine claims the standard deduction?She can claim the educator's deduction in the amount of $250 for AGI.

On June 15, 2019, Louise purchased the rights to a gravel interest for $1,500,000. At that time, it was estimated that the recoverable units would be 100,000. During the year, 20,000 units were mined and 10,000 units were sold for $200,000. Louise incurred expenses during 2019 of $50,000. Louise's depletion deduction for 2019 using the percentage depletion method would be: a.$10,000. b.$200,000. c.$150,000. d.$175,000. e.$75,000.

a.$10,000. Incorrect. $200,000 × 5% (Exhibit 8.2) = $10,000 percentage depletionNote that ($200,000 - $50,000) × 50% = $75,000 is the percentage limit, not the percentage depletion.

In the current year, Celeste travels from Boston to Houston primarily for business. She spends five days conducting business and three days sightseeing and attending shows. Her plane and taxi fares amount to $1,500. Her meals amount to $150 per day, and lodging and incidental expenses are $400 per day. Her deductible expenses are: a.$3,875. b.$4,250. c.$0. d.$2,375. e.$1,500.

a.$3,875. She can deduct the transportation charges of $1,500, because the trip is primarily for business (five days of business versus three days of sightseeing). Meals are limited to five days and are subject to a 50% reduction, for a total of $375 [5 days × ($150 × 50%)], and other expenses are limited to $2,000 (5 days × $400). The total deductible expenses are $1,500 + $375 + $2,000 = $3,875.

Which of the following miscellaneous itemized deductions is not subject to the 2%-of-AGI floor? a.Amortizable premium on taxable bonds b.Legal, accounting, and tax return preparation fees c.Expenses of job hunting d.Home office expenses of an employee or outside salesperson e.Appraisal fees for a casualty loss

a.Amortizable premium on taxable bonds Certain miscellaneous itemized deductions, including most unreimbursed employee business expenses, are subject to a 2%-of-AGI floor. The following expenses are not deductible from 2018 through 2025: All § 212 expenses, except expenses of producing rent and royalty income; all unreimbursed employee business expenses, after the 50% limit for meals, if applicable; professional dues and subscriptions; union dues and work uniforms; employment-related education expenses (except § 222 qualified tuition and related expenses); expenses of job hunting (including employment agency fees and résumé-writing expenses); home office expenses of an employee or outside salesperson; legal, accounting, and tax return preparation fees; hobby expenses, up to hobby income; investment expenses, including investment counsel fees, subscriptions, and safe deposit box rental; custodial fees relating to income-producing property or a traditional IRA or a Keogh plan; and appraisal fees paid to determine a casualty loss or charitable contribution.

In contrasting the reporting procedures of employees and self-employed persons regarding job-related transactions, which of the following items involves self-employed persons? a.Schedule C of Form 1040 b.Schedule 6 of Form 1040 c.Schedule A of Form 1040 d.Schedule B of Form 1040 e.Form W-2

a.Schedule C of Form 1040 Schedule B is used to report interest and dividend income ("Schedule B of Form 1040"). Schedule C is used to list the job-related income and expenses of self-employed taxpayers ("Schedule C of Form 1040"). Form W-2 reports the wages earned by employees ("Form W-2"). Income earned by self-employed persons is often shown on Form 1099. Schedule A is for itemized deductions ("Schedule A of Form 1040").

Keogh plans follow the same deduction approach as which of the following? a.Traditional IRAs b.Roth IRAs c.401(k) plans d.Employee pension plans e.Section 179 of the IRC

a.Traditional IRAs The amount contributed under a plan is a deduction for AGI and is reported as a deduction on Form 1040.

Prism Associates purchases framed prints from a local artist and mails one to each of its three favorite clients. Each print costs $70; packaging and shipping costs are $10 per print. Presuming proper substantiation, Prism Associates' deduction is: a.$85. b.$105. c.$55. d.$75. e.$115.

b.$105. Prism may deduct $35 for each print sent ($25 gift maximum + $10 for packaging and shipping) × 3 clients = $105. Business gifts are deductible only to the extent of $25 per donee per year. Incidental costs such as engraving, gift wrapping, mailing, and delivery are also allowed (in addition to the $25 maximum).

On June 1, 2019, Mako Corporation purchased an existing business. With respect to the acquired assets of the business, Mako allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. The total amount that Mako may amortize for 2019 for the patent would be: a.$35,000. b.$11,667. c.$300,000. d.$0. e.$1,667.

b.$11,667. Correct. $300,000 × (7 months/180 months) = $11,667. The statutory amortization period for § 197 intangibles is 15 years.

Which of the following statements regarding the QBI deduction is true? a.QBI can only be deducted if itemized deductions are used. b.QBI is the last deduction before taxable income. c.QBI is deducted for AGI. d.QBI can only be deducted if the standard deduction is used. e.QBI is no longer used after December 31, 2018.

b.QBI is the last deduction before taxable income. The QBI deduction is a from AGI deduction. This deduction is the last deduction taken in determining taxable income. It is available whether a taxpayer uses the standard deduction or itemizes deductions.

Which of the following Code Sections covers the topic of amortization? a.Section 198 b.Section 197 c.Section 199 d.Section 179 e.Section 195

b.Section 197 Correct. Code § 197 provides for cost recovery for certain intangible assets via the process of amortization.

Section 179 expensing is subject to which of the following limitations? a.The floor cannot exceed $2,000,000 for 2019. b.The ceiling cannot exceed $1,020,000 for 2019. c.The property placed in service maximum is $3,550,000 for 2019. d.The deduction must exceed the taxpayer's business income for the year. e.The property placed in service minimum is $2,550,000 for 2019.

b.The ceiling cannot exceed $1,020,000 for 2019. Correct. Code § 179 provides some specific options for taxpayers. One of the provisions permits the taxpayer to deduct up to $1,020,000 in 2019 immediately (the ceiling).

c.$105. Prism may deduct $35 for each print sent ($25 gift maximum + $10 for packaging and shipping) × 3 clients = $105. Business gifts are deductible only to the extent of $25 per donee per year. Incidental costs such as engraving, gift wrapping, mailing, and delivery are also allowed (in addition to the $25 maximum).

When considering tax planning ideas related to employee and self-employed business expenses, which of the following factors is a characteristic of employee status? a.Services performed for more than one party b.Unreimbursed business expenses c.Employer has right to control the means and methods of accomplishing the work d.Not furnishing tools or equipment or a place to work e.Worker paid on a flat fee for the job

c.Employer has right to control the means and methods of accomplishing the work The key test is whether the business maintains the right to control the means and methods of accomplishment of the work. This is an important consideration for an individual's tax planning purposes with regard to employee and self-employed business expenses.

Under the modified accelerated cost recovery system, the cost of an asset is recovered: a.Over a time period that generally is longer than the economic life of the asset. b.Over an amount that generally is higher than the historical cost of the asset. c.Over a time period that generally is shorter than the economic life of the asset. d.Over a time period equal to 90% of the economic life of the asset. e.Over an amount that generally is lower than the historical cost of the asset.

c.Over a time period that generally is shorter than the economic life of the asset.

Which of the following factors is a characteristic of independent contractor status? a.Work-related income and expenses are reported on Schedule D. b.A Form 1040 reporting payment is received. c.Services are performed for more than one party. d.Workplace fringe benefits are available. e.Independent contractors are subject to employer FUTA taxes.

c.Services are performed for more than one party.

Section 179 expensing is subject to which of the following limitations? a.The floor cannot exceed $2,000,000 for 2019. b.The ceiling cannot exceed $2,000,000 for 2019. c.The property placed in service maximum is $2,550,000 for 2019. d.The deduction must exceed the taxpayer's business income for the year. e.The property placed in service minimum is $2,550,000 for 2019

c.The property placed in service maximum is $2,550,000 for 2019. Correct. Code § 179 provides some specific options for taxpayers. One of the provisions permits the taxpayer to deduct up to $1,020,000 in 2019 immediately (the ceiling). Also, property placed in service has a maximum of $2,550,000 for 2019.

Jaman spent $50 in automobile repairs, $500 in automobile insurance, $200 in tolls and parking, $700 in gas and oil, and $30 in parking tickets and fines related to the automobile used for business purposes. He uses the actual cost method to compute his tax deduction. How much is his deduction? a.$750 b.$700 c.$1,480 d.$1,450 e.$250

d.$1,450 Parking tickets and fines are nondeductible expenses because they are a violation of public policy. Jaman's deduction for automobile expenses is $50 + $500 + $200 + $700 = $1,450.

Jamison uses the following in her business: an automobile valued at $5,000, a home office laptop valued at $3,000, and a motorcycle valued at $6,000. What is the total value of the listed property used in her business? a.$5,000 b.$3,000 c.$0 d.$11,000 e.$6,000

d.$11,000 Listed property includes all computers except those used in a qualifying home office, so the total value of Jamison's listed property is $11,000 ($5,000 + $6,000).

Nicole is a sole proprietor who does not itemize deductions. She has business income of $150,000, deductible business expenses of $25,000, and interest income of $5,000 from her business accounts. What is her AGI? a.$125,000 b.$145,000 c.$155,000 d.$130,000 e.$0

d.$130,000 Nicole's AGI is calculated as $150,000 of business income - $25,000 of deductible business expenses + $5,000 of interest income ($150,000 - $25,000 + $5,000 = $130,000).

Which of the following factors is a characteristic of employee status? a.Unreimbursed business expenses b.Worker paid on a flat fee for the job c.Services performed for more than one party d.Employer has right to control the means and methods of accomplishing the work e.Not furnishing tools or equipment or a place to work

d.Employer has right to control the means and methods of accomplishing the work Correct. The key test is whether the business maintains the right to control the means and methods of accomplishment of the work.

The amortization election for startup expenditures allows the taxpayer to deduct the smaller of which of the following? a.The startup expenditures related to the trade or business averaged over three years or $1,000 b.Only the research and development expenditures related to the startup trade or business or $5,000 c.The startup expenditures related to the trade or business averaged over five years or $5,000 d.The startup expenditures related to the trade or business or $5,000 e.The startup expenditures related to the trade or business or $10,000

d.The startup expenditures related to the trade or business or $5,000 Correct. The tax Code provides for cost recovery for certain intangible assets via the process of amortization. Regarding startup expenditures, the additional provisions allow for a deduction that is the smaller of the startup expenditures related to the trade or business or $5,000.

When considering tax planning ideas related to employment status, which of the following factors is an important implication of misclassifying workers as independent contractors? .There are penalties for reimbursing business expenses of an independent contractor. b.There are penalties for paying independent contractors a flat fee for the job. c.There are penalties for performing services for more than one party. d.There are penalties for employers who wrongfully categorize workers as independent contractors. e.There are penalties for not furnishing tools or equipment or a place to work.

d.There are penalties for employers who wrongfully categorize workers as independent contractors.

Morris (self-employed) made the following business gifts during the year: To Quinton (a key client) at Christmas$50To Florence (Quinton's 8-year-old daughter) on her birthday20To Ramon (Morris's secretary) on his birthday ($3 was for gift wrapping)30 Presuming proper substantiation, Morris's deduction is: a.$98. b.$78. c.$103. d.$73. e.$53.

e.$53. $25 (Quinton) + $25 (Ramon) + $3 (gift wrapping) = $53. The gift to Florence counts as a gift to Quinton (whose $25 limit already has been reached).

Mariah is an elementary school teacher who worked 950 hours during the school year and spent $200 on supplies in January, $600 on supplies in March, and $700 on supplies in both July and August 2019. What is Mariah's deduction for educator expenses? a.A $1,400 for AGI deduction educator expense b.A $700 for AGI deduction educator expense c.A $600 for AGI deduction educator expense d.An $800 for AGI deduction educator expense e.A $250 for AGI deduction educator expense

e.A $250 for AGI deduction educator expense . Educator expense has a threshold of $250 as a for AGI deduction. Miscellaneous itemized deductions are not deductible. Mariah is entitled to $200 from January + $50 from the March purchases for a total of $250

Hillary attends a gala to schmooze with business clients. She pays $30 for cab fare, a $20 cover charge, $25 for food, $50 for drinks, and $100 to rent a room to stay the night. Which of her expenses is not subject to the 50% rule? a.Food b.Cover charge c.Drinks d.Room rental e.Cab fare

e.Cab fare Transportation expenses are not subject to the 50% limitation.

Which of the following is usually the most advantageous way to handle intangible drilling and development costs? a.Capitalize and write them off through depletion b.Alternate between charging them off as an expense and capitalizing and writing them off through depletion each year c.Capitalize and write them off through depletion in the first year, then charge them off as an expense in subsequent years d.Charge them off as an expense in the first year, then capitalize and write them off through depletion in subsequent years e.Charge them off as an expense

e.Charge them off as an expense Correct. Once the election is made to either capitalize or expense IDCs, it cannot be changed. As a general rule, it is more advantageous to expense IDCs. One benefit is the immediate write-off (as opposed to a deferred write-off through depletion). Another benefit is that because a taxpayer can use percentage depletion, which is calculated without reference to basis, the IDCs may be completely lost as a deduction if they are capitalized.

Which of the following is a disadvantage of Roth IRAs? a.Contributions are taxed. b.Distributions are taxed. c.They are much less risky than a traditional IRA. d.They are much riskier investments than traditional IRAs. e.Contributions provide no tax benefit.

e.Contributions provide no tax benefit. The tax benefit of Roth IRAs is that distributions are not taxed.

When considering tax planning ideas related to employee and self-employed business expenses, which of the following is the key test for employee verses independent contractor status? a.Furnishing tools b.Worker supervises other workers c.Unreimbursed work-related expenses d.Furnishing equipment e.Right to control the means and method of work

e.Right to control the means and method of work The key test is whether the business maintains the right to control the means and methods of accomplishment (both what must be done and how it should be done). This is an important consideration for an individual's tax planning purposes with regard to employee and self-employed business expenses.

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