Tax Exam 1 Practice Questions
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Dave sells common stock for $15,000 (Amount Realized). He had purchased the stock for $12,000 (Basis) two years ago. The $15,000 Amount Realized consists of
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$12,000 of Basis (recovery of capital) and $3,000 of Gross Income
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Bob borrows $100 from Dave. Does Bob have gross income?
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Bob does not have Gross Income when he receives the $100 from Dave
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One year after Dave loans $100 to Bob, Bob pays Dave $105 with respect to the loan. What is gross income?
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$100 is Repayment of Loan Principal, and is thus NOT Gross Income. $5 is Interest and IS Gross Income
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Sue buys a used piano and finds $10,000 in cash inside. The police can not trace it to a previous owner so Sue is allowed to keep the money. Does she have gross income?
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yes of 10,000
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Dan purchased 100 shares of Amazon stock in 2001 for $30 a share. Today, the Amazon stock is worth $730 a share. Does Dan have any Gross Income related to the Amazon stock?
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NO. Dan will not have Gross Income until he actually sells the Amazon stock. Until he sells the Amazon stock, he has not REALIZED Gross Income.
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must gross income be received in a form of cash?
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NO
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David's employer gave him a painting worth $5,000. 5 years later he sells the painting for $15,000. How would these transactions be recognized in the eyes of the law?
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Tax law pretends David received $5,000 of cash (gross income) and then used the cash to buy the painting (both the employer and David would owe FICA taxes and employer would need to withhold taxes just as if David received cash). David will have a basis of $5,000 in the painting so when he sells it, his gross income will = 15,000-5,000 or 10,000
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Heather cuts hair for a living and has 2 young kids. Every month she cuts Amber's hair for free in exchange for Amber babysitting one night. Does anyone have gross income?
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yes, tax law pretends that Heather paid Amber cash equal to the fair value of the babysitting services and that Amber paid Heather cash equal to her hair cut.
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True or False - Jessica is a cash basis taxpayer. When she failed to repay a loan, the bank garnished her salary. Each week $60 was withheld from Jessica's salary and paid to the bank. Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.
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True
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Weiner (a dog) was recently featured in a hot dog commercial and earned $500. Does Weiner have gross income?
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No, Weiner's owner has $500 of gross income.
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Scott purchased a $10,000 coupon bond with $1,000 coupons payable every December. On December 30 he tore off the coupon and gave it to his grandson Malcolm. Who has gross income?
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Scott will have $1,000 of gross income (interest income) because he was the owner of the bond throughout the year
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On January 1 Scott gave the bond to his other grandson Bryce. Who will have gross income at the end of the year
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Bryce will have gross income equal to the interest income. If Scott had given it to Bryce at the end of january then he would have 31 days of gross interest income to account for and it would reduce Bryce's gross income
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If Sally drives up to Taco bell drive thru and hands Jack $30, Taco Bell has gross income of $30 and Jack is acting as an agent. If Jack steals the $30 what would happen?
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Jack has gross income of $30; Taco Bell has gross income of $30 but will be entitled to deduct a loss of $30
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Paul transfers stock to Rosa as part of a divorce settlement. The cost of the stock to Paul is $12,000, and the stock's value at the time of the transfer is $15,000. Rosa later sells the stock for $16,000. Who has income?
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Paul is not required to recognize gain from the transfer of the stock to Rosa, and Rosa has a realized and recognized gain of $4,000 ($16,000 - $12,000) when she sells the stock.
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Under the divorce agreement, Matt is required to make periodic \"alimony\" payments of $500 per month to Grace. However, when Matt and Grace's child reaches age 21, marries, or dies (whichever occurs first), the payments will be reduced to $300 per month. Grace has custody of the child. How much is actually alimony?
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Child support payments are $200 per month and alimony is $ 300 per month.
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Taxpayer pays $10,000 for annuity that will pay $1,000 a year A: For a term of 15 years B: For lifetime (life expectancy = 15 years) What is the exclusion ratio for A&B? What is taxable and excludable if 15 years of annuity payments? Lifetime payments and they live 18 years? 10 years of annuity payments?
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-ratio: 10,000/15,000= .667 -15 years: 333 taxable and 667 excludable -18 years: years 1-15 same as above; years 16-18 $1,000 taxable each year -10 years: 333 taxable 667 excludable; unrecovered capital of $3,330 (10,000 investment - [667*10])that is deductible on final return
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A father (a Schedule C independent contractor) hires his 14 year old son for a summer job as a receptionist. The father pays the son $100 per hour. The father paid the previous receptionist (also a 14 year old male, but unrelated to the father) $10 per hour. Can the father deduct $100 per hour on his Schedule C? Does the son have $100 of Gross Income per hour?
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NO. the father only gets $10 per hour deduction and the son will only have $10 per hour of gross income. The other $90 per hour is recharacterized as a gift from the father to the son and gifts are not deductible or taxable income
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Dan lives and works in OKC (he occasionally travels for ABC). ABC provides a car for Dan to use when he drives to visit ABC customers in Oklahoma and surrounding states. The car ABC has provided to Dan currently has 200,000 miles so ABC is currently negotiating with Happy Car Ford Dealer to obtain a new car for Dan to use. Happy Car offers two options: 1) ABC can purchase the new car for $20,000 and Happy Car will finance 100% of the purchase price at a 5% rate of interest, monthly payments will be $377 a month for 60 months. 2) ABC can lease the car from Happy Car and the payments would be $376 a month for 60 months. At the end of the 60 months ABC will have the option of purchasing the care from Happy Car for $60. ABC chooses option 2 and signs a document labeled lease. Is there substance over form?
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even though the document signed is labeled lease, for tax purposes ABC has purchased the car from Happy Car. In substance the transaction was a sale by Happy Car and a purchase by ABC together with a loan from Happy Car to ABC even though the form of transaction was a lease. Thus when ABC pays $376 a month they do not have a rental expense deduction and Happy Car does not have rental income. Instead the payment is a loan payment from ABC to Happy Car and ABC will have interest expense deduction and Happy Car will have gross income (interest income) for the interest portion of the payment. Because ABC owns the car for tax purposes, they should take the depreciation deduction for the car. Also at the time that the lease is signed, Happy Car will have gross income equal to $20,000 (the present value of the lease payments) minus its basis in the car.
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Cindy owns 100% of GHI, Inc. Cindy wants to trade on E*Trade, so she borrows $10,000,000 from GHI. The current statutory federal rate of interest is 5%, but the loan agreement between GHI and Cindy does not require payment of any interest. How does IRC treat this?
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IRC § 7872 will create a \"pretend round trip of money\". That is, IRC § 7872 will create a pretend 5% interest payment from Cindy to GHI followed by a pretend return of the money to Cindy. 5% of $10,000,000 is $500,000. So, first IRC § 7872 will create a pretend $500,000 interest payment from Cindy to GHI. Thus, GHI will have $500,000 of Gross Income (Interest Income) and Cindy will have $500,000 of possible investment interest deduction. Second, IRC § 7872 will create a pretend return of the $500,000 to Cindy. When a corporation distributes money to a shareholder, it is generally a dividend, so Cindy will have $500,000 of Gross Income (Dividend Income).
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Frank works for a car rental agency in Texas. His employer allows his daughter Nancy to take one of the agency's cars to college with her in Massachusetts. How does tax law treat this?
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Tax law pretends the car rental agency handed cash equal to the fair value of the car to frank, who then handed the cash to nancy, who then handed the cash to the car rental agency. Thus Frank will have gross income equal to the fair rental value of the car, just as if he had received that amount in cash. Very likely the pretend handling of the cash from Frank to Nancy will be a gift. The car rental agency will have gross income equal to the fair value of the car just as if nancy had paid cash in that amount for her use of the car
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Rusty has been experiencing serious financial problems. His annual salary was $ 100,000, but a creditor garnished his salary for $ 20,000; so the employer paid the creditor ( rather than Rusty) the $ 20,000. To prevent creditors from attacking his investments, Rusty gave his investments to his 21- year- old daughter, Rebecca. Rebecca received $ 5,000 in dividends and interest from the investments during the year. Rusty transferred some cash to a Swiss bank account that paid him $ 6,000 interest during the year. Rusty did not withdraw the interest from the Swiss bank account. Rusty also hid some of his assets in his wholly owned corporation that received $ 150,000 rent income but had $ 160,000 in related expenses, including a $ 20,000 salary paid to Rusty. Rusty reasons that his gross income should be computed as follows: -Salary received = $ 80,000 -loss from rental property (150,000 160,000) = (10,000) -gross income = 70,000 Compute Rusty's correct gross income for the year and explain any differences between your calculation and Rusty's.
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Salary = 100,000 -rusty earned 100,000 and used 20,000 to pay his debts interest = 6,000 -must include his gross income from all sources Loss = 0 -the corporation is the owner of the property, therefore the rent and income expenses remain in the corporation Salary = 20,000 -he received the salary from the corporation, a separate entity Gross income = 126,000 rusty is not taxed on the interest and dividends of 5,000 received by Rebecca because she is the owner of the income-producing property
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True or False - Gross income must have as its source services income or earnings from property.
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False, there are other things that it includes
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True or False - ABC, Inc. recognizes $100,000 of income due to appreciation, but not sale, of Trading Securities in its financial statements prepared according to GAAP. ABC must also recognize $100,000 of gross income on its tax return.
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False, no income till sale
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If a taxpayer receives cash, what will determine whether the cash constitutes a Deposit?
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someone other than the taxpayer has control over whether the taxpayer must return the cash
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Bob's employer sells him a truck worth $20,000 for $8,000. Bob's related income: ____________________ Bob's employer's related deduction: ________________________ Bob's basis in the truck: __________________________
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Bob's related income: 12,000 Bob's employer's related deduction: 12,000 Bob's basis in the truck: 20,000
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Gross income from services must be included in the gross income of the taxpayer ________________________________________________________________.
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who performed the services
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Income from property (interest, dividends, rent) must be included in the gross income of the taxpayer _____________________________________________________________.
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that owns the property
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Interest income accrues ___________________________.
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DAILY
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Dividends are taxed to whomever owns the stock on the ______________________ date.
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record
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James and Diane are married and live in Texas. Diane earns $100,000 a year at her job and they file Married Filing Separately. How much income should Diane include on her return for her income from her job?
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$50,000
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How should Alimony be reported on the tax returns of the payor and recipient?
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Alimony is deductible by payor and included in gross income of recipient
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How should Child Support be reported on the tax returns of the payor and recipient
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nondeductible by payor and not taxed to recipient
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Bob must pay a former wife $5,000 a month. According to the divorce decree, the entire amount is \"alimony\". Also according to the divorce decree, the payments will be reduced to $3,000 when Bob's child who lives with his former wife reaches age 21. How much may Bob deduct each month for the payments he makes to his former wife?
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Bob can deduct $3,000 as alimony and the $2,000 child support is non-deductible
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When Bob and his former wife divorced, she received sole ownership of their previously jointly owned home. At that time, the house had a basis of $100,000 and a fair market value of $200,000. Bob's related gross income: ____________________________ Bob's wife's related gross income: _______________________ Bob's wife's basis in the home: __________________________
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Bob's related gross income: 0 Bob's wife's related gross income: 0 Bob's wife's basis in the home: 100,000
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Susan purchased a commercial annuity for $100,000. Her life expectancy is 20 years and she will receive $10,000 a year for as long as she lives. Susan lives for 30 years. Susan's related gross income year 5: ________________________ Susan's related gross income year 25: _______________________
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Susan's related gross income year 5: 5,000 (5,000 excludable) Susan's related gross income year 25: 10,000
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You may exclude Group Term Life Insurance premiums on the first $________________ of coverage paid for by your employer.
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50,000
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True or False - Unemployment compensation is EXcluded from gross income.
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False, it is taxable in full
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True or False - Interest will generally not be imputed for loans of $10,000 or less between individuals.
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True, unless loan proceeds are used to purchase income-producing properties
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Describe the Entity Concept.
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every legal entity must keep its separate records, file its separate tax return, and pay tax on its own taxable income, moline properties
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Describe the Arm's-length Transaction Doctrine.
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When related parties engage in transactions, the terms of the transaction must generally be the same as they would have been had the parties been unrelated
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Describe the Economic Substance Doctrine.
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If a transaction had no economic substance, then the taxpayer will be taxed as if the transaction never occurred. No economic substance if it does not have realistic chance of profitability absent the tax savings generated by the transaction
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True or False - Anytime a taxpayer receives anything of value, the taxpayer will be presumed to have additional gross income.
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True
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True or False - Although gifts are not included in gross income, inheritances are included in gross income.
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False
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True or False - Generally, if not required pursuant to the employment contract, transfers by employers to employees qualify as excludable gifts.
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False
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Amounts received under a life insurance contract are excludable from gross income if received because of ____________.
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the death of the insured
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Gain on cash surrender or transfer of life insurance policy may be excluded from gross income if policy on the life of individual who is_______ or______ ill.
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terminally chronically
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Scholarships may be excluded from gross income if used for which of the following? tuition fees books housing food
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tuition fees books
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OU employees may exclude tuition remission for which of the following? Undergraduate courses Graduate courses
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Undergraduate courses
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Describe how damages received for the following are GENERALLY taxed (assume NOT for PHYSICAL personal injury). a. Loss of income b. Expenses incurred c. Property destroyed d. Pain and suffering e. Punitive damages
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a. Loss of income i. Generally, taxed the same as the income replaced b. Expenses incurred i. Not income, unless the expense was deducted ii. Damages that are a recovery of the taxpayer's previously deducted expenses are generally taxable under the (Tax Benefit Rule) c. Property destroyed i. Treated as an amount received in a sale or exchange of the property ii. Taxpayer has realized gain if damage payments exceed property's basis d. Pain and suffering i. Compensatory damages for nonphysical injury are taxable e. Punitive damages i. Always taxable
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Describe how damages received for the following are taxed if received for PHYSICAL personal injury. a. Loss of income b. Expenses incurred c. Pain and suffering d. Punitive damages
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a. Loss of income i. Amounts received for loss of income associated with the physical personal injury or physical sickness are excludible b. Expenses incurred i. Not taxable income, unless the expense was deducted ii. Damages that are a recovery of the taxpayer's previously deducted expenses are generally taxable under the (Tax Benefit Rule) c. Pain and suffering i. Compensatory damages received on account of physical personal injury or physical sickness are excludible d. Punitive damages i. Always taxable
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True or False - Workers' Compensation must be included in gross income.
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False
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True or False - If the taxpayer pays the premiums for a disability or health insurance policy, benefits received thereunder are excludable even if they are substitute for income.
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True
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True or False - If the taxpayer's employer pays the premiums for a disability or health insurance policy, benefits received thereunder must be included in gross income unless for medical care or permanent loss of body part or function.
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True
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True or False - See preceding question. The related premiums paid by the employer must be included in the employee's gross income.
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False
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Describe when meals and lodging provided to an employee may be excluded from the employee's gross income under IRC § 119.
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If furnished by employer on employer's business premises or for convenience of employer. In the case of lodging, employee is required to accept lodging as a condition of employment for it to be not taxed to employee.
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Employer-provided educational assistance for (Undergraduate or graduate) education is excludable for up to $_______ per year. The assistance may be used for which of the following? tuition, fees, books, supplies, meals, lodging, transportation
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both Undergraduate and graduate; $5,250; tuition, fees, books, supplies;
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Describe the requirements for employees to exclude the following under IRC 132. a. No Additional Cost Services b. Qualified Employee Discounts c. Working Condition Fringes d. De Minimis Fringes
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a. No Additional Cost Services i. Employee receives services (not property) ii. Employer incurs no substantial additional cost in providing the services iii. Services offered are within line of business in which employee works iv. Benefit is offered on nondiscriminatory basis v. Extends to the employee's spouse and dependent children and to retired and disabled former employees b. Qualified Employee Discounts i. Discount is not on realty or investment property ii. Item discounted is from same line of business in which employee works iii. Discount cannot exceed gross profit on property or 20% of the customer price on services iv. Benefit is offered on nondiscriminatory basis v. Extends to the employee's spouse and dependent children and to retired and disabled former employees c. Working Condition Fringes i. If employee could have deducted cost of item if they had actually paid for them (can be offered on a discriminatory basis) d. De Minimis Fringes i. These benefits are so small that accounting for them is impractical (can be offered on discriminatory basis) ii. Examples: occasional personal use of company copier & company picnics
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Income from personal services in a foreign country can be excluded from gross income if the worker is present in the foreign country for at least_____ days during any 12 consecutive months.
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330
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Interest income received on which of the following types of government obligations may be excluded from gross income? city county state federal
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city county state
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Interest income on Series EE U.S. Savings Bonds may be excluded from gross income if used to pay for ______________ and if issued to person at least____ years old.
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qualified higher educational expenses: 24;
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Describe the Tax Benefit Rule.
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Generally, if a taxpayer obtains a deduction for an item in one year and in a later year recovers all or a portion of the prior deduction, the recovery is included in gross income in the year received. However, the tax benefit rule limits income recognition when a deduction does not yield a tax benefit in the year it is taken.
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True or False - Generally, discharge from indebtedness is included in gross income.
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True
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Briefly describe the most common circumstances under which discharge from indebtedness may be excluded from gross income.
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When the debtor is insolvent (the debtor's liabilities exceed the FMV of the debtor's assets) or when the cancellation of debt results from a bankruptcy proceeding.
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True of False - Deductions are allowed unless a specific provision in the tax law provides otherwise.
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False
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True or False - the income of a sole proprietorship is reported on schedule C (profit or loss from business)
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True
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Carissa is a lawyer. She has never used a jury consultant before she decides to hire one for her new case. She loses the case. She believes she would have won the case if she hadn't listened to the jury consultant, so she vows never to hire one again. Although this is very likely the only time Clarissa will ever use a jury consultant, using a jury consultant, using a jury consultant is of common or frequent occurrence in the lawyer business. Will the expense be considered ordinary?
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Yes, because Carissa is a lawyer that means that a jury consultant is an ordinary expense for her business.
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True or False - An expense need not be recurring in order to be \"ordinary.\"
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True
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Carey is a waiter at a restaurant that pays a small hourly amount plus tips. Customers are not required to tip the waiter. Carey is especially attentive and friendly, and her tips average 25% of the restaurant charges. Is Carey required to include any of her tips in gross income when the customer has no legal obligation to make the payment? Explain the basis for your conclusion.
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Carey must include all of her tips in gross income. Although the customers have no legal obligation to pay her, in fact, the payments are for her services to the customer. Therefore, the payments are compensation for services.
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Mark purchases an insurance policy on his life and names his wife, Linda, as the beneficiary. Mark pays $45,000 in premiums. When he dies, Linda collects the insurance proceeds of $200,000. How much is exempt?
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The $200,000 is exempt from Federal income tax.
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Kelly receives a scholarship of $9,500 from State University to be used to pursue a bachelor's degree. She spends $4,000 on tuition, $3,000 on books and supplies, and $2,500 for room and board. How much can she exclude?
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Kelly may exclude $7,000 ($4,000 + $3,000) from gross income. The $2,500 spent for room and board is includible in Kelly's gross income.
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True or false -- Sam was unemployed for the first two months of 2014. During that time he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers' compensation benefits. Sam's Federal gross income is...
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18,000 = 4,000 + 14,000
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Bonnie purchases a medical and disability insurance policy. The insurance company pays Bonnie $1,000 per week to replace wages she loses while in the hospital. Is that gross income?
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Although the payments serve as a substitute for income, the amounts received are tax-exempt benefits collected under Bonnie's insurance policy.
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Jill loses an eye in an automobile accident unrelated to her work. She collects $10,000 from an accident insurance policy carried by her employer. The benefits are paid according to a schedule of amounts that vary with the part of the body injured (e.g., $10,000 for loss of an eye and $20,000 for loss of a hand). Jill is absent from work for a week as a result of the accident. Her employer provides her with insurance for the loss of income due to illness or injury. Jill collects $500.
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the payment is for loss of a member or function of the body, the $10,000 is excluded from gross income. $500 includible in gross income.
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Joe is a graduate student who works as a resident adviser (RA) in the college dormitory. As compensation for serving as an RA, he is not charged the $2,200 other students pay for their dormitory rooms for the fall 2014 semester. As an RA, he is required to live in the dormitory. He is also paid $1,500 for being available to dormitory residents at all hours during the fall semester. Joe also has a scholarship that pays him $12,000 to be used for his tuition for the academic year. He uses the scholarship proceeds to pay $6,000 of tuition in August 2014. In January 2015, he pays $ 6,000 for his spring semester tuition. What is Joe's gross income for 2014?
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Joe's gross income is $1,500. The use of a room, which is valued at $2,200, is excluded from gross income because it is mandatory lodging provided on the employer's business premises for the convenience of the employer. The scholarship of $12,000 used for tuition can also be excluded from Joe's gross income (as long as he spends the $12,000 for tuition by the end of the year following receipt, he may exclude it).
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Hawk Corporation offers its employees (on a nondiscriminatory basis) a choice of any one or all of the following benefits: Benefit Cost Group term life insurance: 200 Hospitalization insurance for family members: 2,400 Child care payments: 1,800 =$ 4,400 If a benefit is not selected, the employee receives cash equal to the cost of the benefit. Kay, an employee, has a spouse who works for another employer that provides hospitalization insurance but no child care payments. Kay elects to receive the group term life insurance, the child care payments, and $2,400 of cash. How much gross income does she have?
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Only the $2,400 must be included in Kay's gross income.
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Melba's employer provides a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2014, but by the end of December 2014, she still had $300 remaining in the account. Melba intended to get new eyeglasses, but was too busy during the holiday season. Is Melba required to forfeit the balance in her flexible spending account? Explain.
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Not necessarily—she has until March 15, 2015, to spend the balance in her flexible spending account as of the end of 2014 for covered services.
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Ted works for Azure Motors, an automobile dealership. All employees can buy a car at the company's cost plus 2%. The company does not charge employees the $300 dealer preparation fee that nonemployees must pay. Ted purchased an automobile for $29,580 ($29,000 + $580). The company's cost was $29,000. The price for a nonemployee would have been $33,900 ($33,600 + $300 preparation fee). What is Ted's gross income from the purchase of the automobile?
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The discount on the price of the automobile of $4,600 ($33,600 − $29,000) is a qualified employee discount. The discount can be excluded from Ted's gross income because the price he paid was above the employer's cost. However, Ted must include in gross income 80% of the dealer preparation fee, a service, of $300, which is $240 ($300 × 80%). The maximum qualified employee discount that can be excluded for a service is 20%.
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In year 1, taxpayer deducted as a bad debt loss a $1,000 receivable from a customer when it appeared the amount would never be collected. In year 2, the customer paid $800 on the receivable. what would happen if taxable income was $10,000? ($10,000)? $500?
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If year 1 taxable income was $10,000, the entire $800 must be included in year 2 taxable income. If year 1 taxable income was ($10,000), none of the $800 must be included in year 2 taxable income. If year 1 taxable income was $500 before deducting the bad debt loss, $500 of the $800 must be included in year 2 taxable income.
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Harry purchased equipment for his business and gave the seller cash and a note due in two years. Larry also purchased business equipment, but financed the transaction with a bank loan. Because Harry and Larry were having financial difficulty, the creditors reduced the balance due on each mortgage by $50,000. What are the tax effects of the debt adjustments experienced by Harry and Larry?
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The adjustment to Harry's obligation is considered a reduction in Harry's basis in the equipment, and no income is recognized (because constitutes seller's cancellation of buyer's debt). Thus, Harry's income is deferred (e.g., future depreciation expense will be reduced). The adjustment to Larry's debt increases his gross income from the discharge of his debt. This amount must be included in his gross income unless he is bankrupt or insolvent.
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Ralph has experienced financial difficulties as a result of his struggling business. He has been behind on his mortgage payments for the last six months. The mortgage holder, who is a friend of Ralph's, has offered to accept $80,000 in full payment of the $100,000 owed on the mortgage and payable over the next 10 years. The interest rate of the mortgage is 7%, and the market rate is now 8%. What tax issues are raised by the creditor's offer?
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Ralph needs to identify and resolve the following issues: • Is the friend forgiving the debt as a gift to Ralph? • Did the mortgage holder sell the property to Ralph? • Is Ralph insolvent or undergoing bankruptcy proceedings?
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Tom own 100% of GHI, Inc. In 2007 Tom's sixteen-year-old son worked for GHI and was paid $10,000 per month. Another sixteen-year-old worked for GHI during the summer and performed essentially the same duties as Tom's son This worker was paid $2,000 per month. How much may GHI properly deduct each month for amounts paid to Tom's son?
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$2,000, the same amount that could be deducted for an unrelated party
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Nancy was a defendant in two legal suits this year. In the first legal suit, Nancy was being sued because she allegedly ran a red light and hit a motorcycle while traveling to Wal-Mart on Saturday to purchase groceries. In the second legal suit, Nancy was being sued for allegedly providing negligent investment advice to a client (Nancy is a stockbroker). Which legal fees may Nancy deduct?
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Only the legal fees for the second suit because only that one had its origin in her trade or business.
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Terry traveled to a neighboring state to investigate the purchase of two hardware stores. His expenses included travel, legal, accounting, and miscellaneous expenses. The total was $52,000. He incurred the expenses in June and July 2014. Under the following circumstances, what can Terry deduct in 2014?
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Terry can immediately expense $3,000 and amortize the $49,000 balance ($52,000 − $3,000) over a period of 180 months beginning in October (the month the business is started). The deduction for 2014 is $3,817 [$3,000 + $817 ($49,000 ÷ 180 × 3 months)].
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Which of the following are capital expenditures for tax purposes? a. cost of defending or perfecting title to property b. commissions paid in purchasing securities c. changing the oil in trucks used for business purposes d. a and b e. all of the above f. none of the above
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d
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Do expenditures have to create or relate to a \"separate and distinct asset\" to be subject to capitalization?
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No
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True or False - Tim makes his living selling popcorn on a street corner. He pops the corn and then places his product in paper bags while it is still warm. In 2006 Tom did not keep any records pertaining to the cost of the paper bags he used during the year. Tom may not properly deduct any amount for the cost of the paper bags on his 2006 return.
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The answer is false. Clearly, one must incur the cost of packaging if one is selling popcorn. Thus, Tim will be able to deduct some estimated amount for the cost of packaging, but the estimated amount should be lower than the actual cost of packaging.
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Brittany Callihan sold stock (basis of $184,000) to her son, Ridge, for $160,000, the fair market value. a) What are the tax consequences to Brittany? b) What are the tax consequences to Ridge if he later sells the stock for $190,000? For $152,000? For $174,000?
answer
a. Brittany's $24,000 loss ($160,000 amount realized − $184,000 adjusted basis) is not deductible due to § 267. b. If sold for $190,000, Ridge's recognized gain is $6,000 [$190,000 (sales price) less $160,000 (basis), reduced by the $24,000 loss that previously was not allowed to Brittany]. If sold for $152,000, an $8,000 loss [$152,000 (sales price) less $160,000 (basis)] is recognized by Ridge. The $24,000 loss that was realized by Brittany is not deductible by either Brittany or Ridge and is lost permanently. If sold for $174,000, there is no recognized gain to Ridge [$174,000 (sales price) less $160,000 (basis), reduced by $14,000 of the $24,000 loss that previously was not recognized by Brittany]. The remaining $10,000 of unrecognized loss is lost permanently as a deduction for both Brittany and Ridge.
question
In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?
answer
Disallowed loss to Lance of $2,000; gain to James of $1,000.
question
Which of the following is not a related party for constructive ownership purposes under § 267? a. The taxpayer's aunt b. The taxpayer's brother c. The taxpayer's grandmother d. A corporation owned more than 50% by the taxpayer e. None of the above
answer
a
question
Clear, Inc., is a bottled water distributor. Clear's delivery trucks frequently are required to park in no- parking zones to make their deliveries. If the trucks are occasionally ticketed, can Clear deduct the fines that it pays? Explain.
answer
No, Clear cannot deduct the fines because they are payments in violation of traffic laws.
question
True or False - Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they are related to a trade or business.
answer
False
question
True or False - Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.
answer
False
question
Andrew, who operates a laundry business, incurred the following expenses during the year: -Parking ticket of $250 for one of his delivery vans that parked illegally -Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa -DUI ticket of $500 while returning from the rock concert -Attorney's fee of $600 associated with the DUI ticket What amount can Andrew deduct for these expenses?
answer
a big fat goose egg
question
Which of the following is a required test for the deduction of a business expense? a) ordinary b) necessary c) reasonable d) All of the above e) None of the above
answer
d
question
Where do Self-employed persons deduct business expenses (on what tax forms)?
answer
Form 1040 and Schedule C
question
Where do employees deduct business expenses (on what tax forms)?
answer
Form 2106 and Schedule A
question
List three factors used to determine whether a worker is an employee versus self-employed.
answer
Person is classified as an employee if: -Subject to will and control of another with respect to what shall be done and how it shall be done -Another furnishes tools or the place of work -Income based on time spent rather than task performed
question
Explain the difference between Transportation and Travel expenses.
answer
Transportation expenses only include 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 and Travel expenses include lodging, meals, and misc. expenses while AWAY from tax home at least OVERNIGHT on business.
question
Which of the following are deductible Transportation expenses for taxpayer who has two jobs? a. Commuting from home to first job. b. Travel from first job to second job. c. Both a and b d. Neither a nor b
answer
b
question
Explain what is meant by \"away from tax home\" overnight on business.
answer
To be away from a business location for a period longer than an ordinary day's work and must require rest, sleep, or relief from work
question
If a taxpayer is \"away from tax home\" overnight on business, describe the related expenses they may deduct.
answer
Transportation, lodging, meals and miscellaneous expenses (only 50% of meals and entertainment may be deducted)
question
True or False - Pursuant to IRC § 217, a taxpayer may deduct moving expenses related to their first job.
answer
true
question
Describe the two tests that must be met to deduct expenses pursuant to IRC § 217.
answer
Distance Test- distance from old home to new job must be at least 50 miles farther than from old home to old job Time Test- taxpayer must be full-time employee for 39 weeks in 12 month period following the move
question
If a taxpayer meets the two tests described in the preceding question, what expenses may they deduct? -- mileage lodging meals
answer
mileage lodging
question
Which of the following are deductible pursuant to IRC § 162? a. Education expenses related to meeting the minimum educational standards for taxpayer's existing job. b. Education expenses related to qualifying for a new trade or business. c. Both a and b d. Neither a nor b
answer
d
question
If education expenses qualify pursuant to IRC § 162, which types of expenses are deductible? - - tuition books supplies transportation lodging meals
answer
all, tuition books supplies transportation lodging meals
question
13. Which of the following are deductible pursuant to IRC § 222? a. Education expenses related to meeting the minimum educational standards for their existing job. b. Education expenses related to qualifying for a new trade or business. c. Both a and b d. Neither a nor b
answer
c
question
If education expenses qualify pursuant to IRC § 222, which types of expenses are deductible? - - tuition books supplies transportation lodging meals
answer
tuition and fees
question
___% of meals and entertainment are generally deductible.
answer
50%
question
Which of the following are deductible? a. Country club dues b. Public service club dues c. Both a and b d. Neither a nor b
answer
b
question
Business gifts of tangible personalty with a value of ____ or less per person per year are deductible.
answer
$25
question
List the two requirements for a home office to constitute a \"principal place of business\" for which related expenses may be deducted.
answer
Taxpayer conducts administrative and management activities in the home office and there is no other fixed location where taxpayer could conduct these activities. Office must be used exclusively and on a regular basis.
question
True or False - Reimbursed amounts received under an Accountable plan should be included in gross income and deducted on Form 2106.
answer
false
question
True or False - If a taxpayer can point to a specific Code provision allowing a deduction and prove that a given item meets each and every requirement of the provision, then the taxpayer will always be entitled to a deduction.
answer
false
question
List the four requirements for an amount to be deductible pursuant to IRC § 162.
answer
Ordinary, necessary, reasonable, paid or incurred during the taxable year in carrying on any trade or business.
question
True or False - To be \"ordinary\" under IRC § 162, an expenditure must be incurred during most taxable years of the taxpayer.
answer
false
question
True or False - Only compensation must be reasonable in amount to be deductible pursuant to IRC § 162.
answer
false
question
Can it make a difference whether a taxpayer is considering entering a NEW business as opposed to expanding an EXISTING business? Explain.
answer
Yes it can, especially for investigation expenses. If the taxpayer is in a business the same as or similar to that being investigated then those expenses are deductible in the year paid or incurred because they related to the business the taxpayer is already in. If the taxpayer is entering a new business, then it depends on whether the new business is acquired or not to figure out if it is deductible. If not acquired then it is nondeductible. If it is acquired then the expenses must be capitalized but may elect to deduct the first $5,000 of expenses currently.
question
True or False - A corporation can properly deduct an expenditure it makes to pay an expense of its wholly owned subsidiary.
answer
false
question
True or False - An expenditure must create or relate to a \"separate and distinct asset\" to be subject to capitalization.
answer
false
question
What is the Cohan rule?
answer
If a taxpayer can prove every requirement for a deduction except establishing the precise amount of the deduction, the taxpayer can obtain a deduction. However the courts or IRS will approximate the amount downward to deter taxpayers from this.
question
If a father purchased a stock for $10,000 three years ago and it is now worth $8,000, may he sell the stock to his daughter for $8,000 and properly deduct the $2,000 loss? Explain.
answer
No, because he sold it to a related party. If his daughter sells the stock to an unrelated party she will have her father's basis and record the gain or loss.
question
True or False - A taxpayer may deduct penalties and fines as long as they were incurred for a business purpose.
answer
false
question
May a taxpayer deduct legal expenses incurred in defense of civil or criminal penalties?
answer
They can deduct legal expenses as long as they are directly related to a trade or business, an income producing activity, or the determination, collection, or refund of a tax. No penalties or fines.
question
May a taxpayer deduct payments made for political purposes or for lobbying? Explain.
answer
Generally, no business deduction is allowed for payments made for political purpose or for lobbying. Exceptions are allowed for lobbying when to influence local legislation, to monitor legislation, and de minimis in-house expenses that are limited to $2,000.
question
True or False -- Rory borrowed $10,000 and used the money to purchase Oklahoma state bonds. Rory may deduct the interest he pays with respect to the loan.
answer
false
question
True or False - CASH basis taxpayers may deduct business bad debts.
answer
false
question
True or False - Publicly traded corporations should generally deduct business bad debts at the same time that they deduct the related expense in their GAAP financial statements.
answer
false
question
True or False - Business bad debts may only be deducted when entirely worthless.
answer
false
question
Jerry loans his best friend Todd $2,000 so that Todd can buy his fiancée an engagement ring. Todd takes bankruptcy. May Jerry take a bad debt deduction? Explain.
answer
Jerry may only take a bad debt deduction if there was a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed or determinable sum of money. Was a note properly executed? Was there a reasonable interest rate? Was collateral provided? What collection efforts were made? What was intent of parties?
question
Briefly define research and experimental expenditures under IRC 174.
answer
All such costs incident to the development or improvement of a product. Including an experimental or pilot model, a plant process, a product, a formula, an invention, or similar property. Expenditures represent research and development costs in the experimental or laboratory sense id they are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. The term does not include expenditures such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotions.
question
Describe a taxpayer's options with respect to deducting the expenditures defined in the preceding question.
answer
Taxpayer can 1) deduct in the year paid or incurred 2) defer and amortize 3) capitalize
question
List the three types of losses that individuals may deduct.
answer
Incurred in a trade or business, Incurred in a transaction entered into for profit, and Casualty losses from fire, storm, shipwreck, and theft
question
Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret's interest payments on the loan this year are $ 4,900, and his principal payments are $1,100. a. Should Jarret report any interest income this year? Explain. b. Can Jarret deduct any interest expense this year? Explain.
answer
a. Although Jarret receives interest payments of $3,800, this entire amount is excluded from his gross income. Interest on municipal bonds is tax-exempt. b. None of Jarret's interest payments of $4,900 on the loan can be deducted. The proceeds of the loan were used to purchase tax-exempt bonds. Consequently, the interest expense deduction is disallowed. Likewise, none of the principal payments of $1,100 can be deducted because this is merely the payment of a liability.
question
Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2014, the following occur associated with bad debts. Credit sales $400,000 Collections on credit $250,000 Amount added to $10,000 Beginning balance in $0 Identifiable bad debts $12,000 What is the amount of deduction for bad debt expense for Petal for 2014?
answer
$12,000
question
Tracy billed Pat $8,000 for services she performed. Pat has never paid the bill, his business no longer exists, and his whereabouts are unknown. What is the treatment of an accrual basis taxpayer? What is the treatment of a cash basis taxpayer?
answer
If Tracy is an accrual basis taxpayer, she includes the $8,000 in income when the services are performed. When she determines that Pat's account will not be collected, she deducts the $8,000 as a bad debt expense. If Tracy is a cash basis taxpayer, she does not include the $8,000 in income until payment is received. When she determines that Pat's account will not be collected, she cannot deduct the $8,000 as a bad debt expense because it was never recognized as income.
question
In 2012, Ross loaned $1,000 to Kay, who agreed to repay the loan in two years. In 2014, Kay disappeared after the note became delinquent. If a reasonable investigation by Ross indicates that he cannot find Kay or that a suit against Kay would not result in collection, how much can Ross deduct?
answer
$1,000 in 2014
question
Assume that Kay (from previous example) filed for personal bankruptcy in 2013 and that the debt is a business debt. At that time, Ross learned that unsecured creditors (including Ross) were ultimately expected to receive 20 cents on the dollar. In 2014, settlement is made, and Ross receives only $150. How much should be deducted?
answer
He should deduct $800 ($1,000 loan - $200 expected settlement) in 2013 and $50 in 2014 ($200 balance - $150 proceeds).
question
True or False - James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $2,000 bad debt deduction in the current year.
answer
False
question
True or False - If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.
answer
True
question
Lana loans $ 2,000 to her widowed mother for an operation. Lana's mother owns no property and is not employed, and her only income consists of Social Security benefits. No note is issued for the loan, no provision for interest is made, and no repayment date is mentioned. In the current year, Lana's mother dies, leaving no estate. Assuming that the loan is not repaid, can Lana take a deduction for a nonbusiness bad debt?
answer
No, she cannot take a deduction for a nonbusiness bad debt because the facts indicate that no debtor-creditor relationship existed.
question
True or False - Research and experimental expenditures do not include the cost of consumer surveys
answer
True
question
Regarding research and experimental expenditures, which of the following are not qualified expenditures? a. Costs of ordinary testing of materials b. Costs to develop a plant process c. Costs of developing a formula d. Depreciation on a building used for research. e. All of the above are qualified expenditures.
answer
a
question
Blue Corporation incurred the following expenses connection with the development of a new product: Salaries $100,000 Utilities $18,000 Materials $25,000 Advertising $5,000 Market Survey $3,000 Depreciation $9,000 Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year.
answer
$0
question
True or False - The limit for the domestic production activities deduction (DPAD) uses all W-2 wages paid to employees by the taxpayer during the tax year.
answer
False
question
Sarah Ham, operating as a sole proprietor, manufactures printers in the United States. For 2014, the proprietorship has QPAI of $400,000. Sarah's modified AGI was $350,000. The W- 2 wages paid by the proprietorship to employees engaged in the qualified domestic production activity were $60,000. Calculate Sarah's DPAD for 2014.
answer
Sarah's DPAD is $30,000 [9% × $350,000 (the smaller of $350,000 modified AGI or $400,000 QPAI)] [not to exceed $30,000 (50% × $60,000 of W-2 wages)].
question
Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2014. Ivory's domestic production activities deduction is...
answer
$54,000
question
For the year 2014, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber's DPAD for 2015 is...
answer
$54,000
question
True or False - A taxpayer can carry any NOL incurred forward up to 20 years.
answer
True
question
Arnold is a lawyer who maintains an office for which he pays the rent. One single client accounts for 95% of his billings. He does routine legal work and income tax returns for this client as requested. The client pays Arnold a monthly retainer and occasionally additional amounts for extra work. Is Arnold is a self-employed individual or an employee?
answer
He is self-employed. Even though most of his income comes from one client, he still has the right to determine how the end result of his work is attained.
question
Ellen is a lawyer hired by Arnold to assist him in the performance of services for the client mentioned in the previous example. Ellen is under Arnold's supervision; he reviews her work and pays her an hourly fee. Is she an employee or self-employed?
answer
Ellen is an employee of Arnold.
question
Mason performs services for Isabella. In determining whether Mason is an employee or an independent contractor, comment on the relevance of each of the factors listed below. a. Mason performs services only for Isabella and does not work for anyone else. b. Mason sets his own work schedule. c. Mason reports his job-related expenses on a Schedule C. d. Mason obtained his job skills from Isabella's training program. e. Mason performs the services at Isabella's business location. f. Mason is paid based on time worked rather than on task performed.
answer
a. Employee. b. Independent contractor. c. Independent contractor. d. Employee. e. Employee. f. Employee
question
Cynthia holds two jobs, a full-time job with Blue Corporation and a part-time job with Wren Corporation. Cynthia customarily leaves home at 7:30 A.M. and drives 30 miles to the Blue Corporation plant, where she works until 5:00 P. M. After dinner at a nearby cafe, Cynthia drives 20 miles to Wren Corporation and works from 7:00 to 11:00 P. M. The distance from the second job to Cynthia's home is 40 miles. What is the distance that can be deducted?
answer
Her deduction is based on 20 miles (the distance between jobs)
question
Norman is the local manager for a national chain of fast-food outlets. Each workday, he drives from his home to his office to handle administrative matters. Most of his day, however, is then spent making the rounds of the retail outlets, after which he drives home. Which costs can be deducted?
answer
The costs incurred in driving to his office and driving home from the last outlet are nondeductible commuting expenses. The other transportation costs are deductible.
question
Vivian works for a firm in downtown Denver and commutes to work. She occasionally works in a customer's office. On one such occasion, Vivian drove directly to the customer's office, a round-trip distance from her home of 40 miles. She did not go into her office, which is a 52-mile round-trip. Which mileage is deductible?
answer
Her mileage for going to and from the temporary workstation (40 miles each way) is deductible.
question
Sue works as an auditor for a large CPA firm. She is part of the audit team for ABC, a new client of the firm. Each weekday for 3 weeks Sue drives from her home to ABC headquarters, which is 10 miles from her home, to work as part of the audit team. Which mileage is deductible?
answer
ABC headquarters is a temporary workstation, so this mileage is deductible.
question
Sam, a building inspector in Minneapolis, regularly inspects buildings for building code violations for his employer, a general contractor. During one busy season, the St. Paul inspector became ill, and Sam was required to inspect several buildings in St. Paul. Are the expenses for transportation for the trips to St. Paul deductible?
answer
Yes.
question
Ella is the regional sales manager for a fast-food chain. She starts her work day by driving from home to the regional office, works there for several hours, and then visits the three sales outlets in her region. Relevant mileage is as follows: Home to regional office 10 Regional office to sales outlet 1 13 Sales outlet 1 to sales outlet 2 11 Sales outlet 2 to sales outlet 3 9 Sales outlet 3 to home 15 If Ella uses the automatic mileage method and works 240 days in 2016, what is her deduction for the year?
answer
$4,277. 240 days × [(13 miles + 11 miles + 9 miles) × $0.54 (automatic mileage rate for 2016)].
question
Jackson uses his automobile 90% for business and during 2016 drove a total of 14,000 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 2016 for the use of his car if he uses: a. The actual cost method? b. The automatic mileage method?
answer
a. $7,090. $140 + $200 + [90% * ($1,300 + $180 + $210 + $160 + $2,850 + $2,800)]. Even though they are associated with business use, the fines of $320 are not deductible. b. $7,144. ([90% * 14,000 miles] × $0.54 [automatic mileage rate for 2016]) + $140 + $200.
question
True or False - A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking.
answer
True
question
Lance, who practices law in New York City, leaves his office on Tuesday at 4:00 A. M., flies to Los Angeles, makes a court appearance at 1:00 P. M., and flies back to New York that same day. a. Was Lance away from home for income tax purposes? Why or why not? b. What difference does it make?
answer
a. Lance was not away from home for tax purposes. By itself, a one-day business trip will not suffice. The trip must require rest, sleep, or a relief-from-work period. b. Non-transportation expenses (e.g., meals) during the trip will not be deductible.
question
True or False - Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was away from home.
answer
False
question
Sue Ann works for a large CPA firm. Her house and office are located in Dallas. The New York office of the firm is temporarily understaffed, so she is assigned to the New York for three months during the busy season. Is Sue Ann on Temporary Assignment while in New York?
answer
Yes
question
Allowing for the cutback adjustment (50% reduction for meals and entertainment), which of the following trips, if any, will qualify for the travel expense deduction? a. Dr. Jones, a general dentist, attends a two-day seminar on developing a dental practice. b. Dr. Brown, a surgeon, attends a two-day seminar on financial planning. c. Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills. d. Myrna went on a two-week vacation in Boston. While there, she visited her employer's hoe office to have lunch with former co-workers. e. All of the above.
answer
a
question
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 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 personal 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 * Split equally between Dr. and Mrs. Spencer. How much, if any, of these expenses can the Spencers deduct?
answer
Although they may be very useful to their 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 750 Meals ([$100 × 3 days = $300] - 50% cutback) 150 Registration fee ($620 − $120) 500 Car rental 300 Total $2,700
question
During the year, John went from Milwaukee to Alaska on business. Preceding a five-day business meeting, he spent four days vacationing at the baech. Excluding the vacation costs, his expenses for the trip are: Airfare 3200 Lodging 900 Meals 800 Entertainment 600 Presuming no reimbursement, what are the deductible expenses?
answer
$3,200 (more business than pleasure days) + $900 + (50% * [$800 + $600]).
question
True or False - Liam just graduation from college. Because it is his first job, the cost of moving his personal belongings from his parents' home to the job site does not qualify for the moving expense deduction.
answer
False
question
True or False - Sick of her 65-mile daily commute, Edna purchases a condo that is only four miles from her job. Edna's moving expenses to her new condo are not allowed and cannot be claimed by her as a deduction.
answer
True
question
The § 222 deduction for tuition and related expenses is available: a. Regardless of the amount of a taxpayer's MAGI b. To cover room and board expenses to attend college c. To a married taxpayer filing a separate return d. Even if a taxpayer does claim the standard deduction e. None of the above
answer
d
question
Joe pays a $40 cab fare to meet his client for dinner. The meal costs $150, and Joe leaves a $30 tip. What is his deduction?
answer
His deduction is $130 [($150 + $30) * 50% + $40 cab fare].
question
Dr. Smith is a self-employed anesthesiologist. During the year, he spends 30 to 35 hours per week administering anesthesia and postoperative care to patients in three hospitals, none of which provides him with an office. He also spends two or three hours per day in a room in his home that he uses exclusively as an office. He does not meet patients there, but he performs a variety of tasks related to his medical practice (e.g., contacting surgeons, bookkeeping, and reading medical journals). Is there a deduction allowed?
answer
A deduction will be allowed because Dr. Smith uses the office in the home to conduct administrative or management activities of his trade or business and there is no other fixed location where these activities can be carried out.
question
True or False - By itself, credit card receipts will not constitute adequate substantiation for travel expenses.
answer
True
