Other Deductions Flashcards
All of the following statements about the 50% limit on business-related meal expenses are true EXCEPT
A. The cost of food at an annual employee picnic is subject to the 50% limit.
B. A pizza parlor’s cost in providing free slices of pizza to the public, as a form of advertisement, is not subject to the 50% limit.
C. A self-employed accountant is not subject to the 50% limit if (s)he was reimbursed and provided the payer with adequate records of the expenses.
D. Employees are not subject to the 50% limit if the employer reimburses the employees under an accountable plan and does not treat the reimbursement as wages.
The cost of food at an annual employee picnic is subject to the 50% limit.
The amount deductible for meal expense is 50% of the actual expense. The limit also applies to the taxpayer’s own meals. Related expenses, such as taxes, tips, and parking fees, but not transportation to and from a business meal, are also subject to the 50% limit. Employee picnics are exempted from the limitation.
You are a self-employed caterer. To encourage the continuation of an existing business relationship, you took one of your clients to a Broadway show. The visit to the show occurred directly after a substantial business discussion with that client. You paid a ticket broker $300 for two tickets to that show. The face value of each ticket was $100 ($200 total). What is your total deductible expense for both tickets?
A. $300
B. $200
C. $0
D. $100
$0
Prior to 2018, entertainment expenses were deductible but subject to a 50% limit of the face value of an entertainment ticket. However, entertainment expenses after 2017 are not deductible (Pub 463).
Which of the following fringe benefits for meals is NOT subject to the 50% deduction limit?
A. Meals furnished to your employees at your place of business when more than half of these employees are provided the meals for your convenience.
B. Meals furnished to your employees at the work site when you operate a restaurant.
C. Meals furnished to your employees as part of the expense of a company picnic.
D. Meals furnished to a customer during a business discussion.
Meals furnished to your employees as part of the expense of a company picnic.
Generally, the amount deductible for meal expenses is 50% of the actual expense. The limit also applies to the taxpayer’s own meals. Thus, meals furnished to a customer during a business discussion qualify. Beginning in 2018, the qualified meals provided for the convenience of the employer are still deductible but now limited to 50%. However, meal expenses for employee recreation, e.g., picnics, remain 100% deductible.
Squire, a self-employed attorney, is a member of Executive Club, which is a professional businesspersons’ club. He uses the club on a regular basis to entertain clients. Squire had the following detailed records to substantiate the expenses of Executive Club during the current year:
Dues
$1,200
Meals consisting of bona fide business discussions with clients
$1,000
Tips
$200
Transportation to/from meals
$150
What amount may Squire deduct on his income tax return for the current year?
A. $750
B. $2,550
C. $1,300
D. $850
$750
The expenses of a meal include amounts spent on food and tips relating to the meal. The amount allowable as a deduction for meal expenses is limited to 50% of the expenses. Transportation expenses to and from a business meal are 100% deductible. No deduction is permitted for club dues. Therefore, the allowable deduction is $750 {$150 + [($1,000 + $200) × 50%]}.
To meet the requirements for deducting meal expenses, you must show which of the following?
A. You provided the meal to someone you had a business connection with.
B. All of the answers are correct.
C. If provided during nondeductible entertainment, the meal expenses are separately stated.
D. You or an employee attended the meal.
All of the answers are correct.
For a business meal to be deductible, the meal must
Be an ordinary and necessary expense;
Not be a lavish or extravagant expense;
*Be attended by the taxpayer or an employee of the taxpayer;
*Be provided to a current or potential business customer, client, consultant, or similar business contact; and
*Be separately stated from any nondeductible entertainment expense or purchased separately from the entertainment.
During the current year, Mr. Tripper paid $10,000 in membership dues to a local country club. His records reflected that he used the club as follows:
Personal use
25%
Business use (e.g., with business associates)
75%
His records also show that he paid $3,000 for meals that were ordinary and necessary for his trade or business. How much of the dues, meals, and entertainment can Mr. Tripper deduct in the current year?
A. $6,500
B. $5,250
C. $3,000
D. $1,500
$1,500
Section 274 disallows a deduction for expenditures made with respect to a facility used in connection with entertainment or recreation (e.g., a country club). The only deduction available to Mr. Tripper is for the business meal expenses of $3,000. The deduction is limited to 50%, or $1,500.
Bob, a calendar-year, cash-basis taxpayer, owns an insurance agency. Bob has four people selling insurance for him. The salesmen incur ordinary and necessary expenses for which Bob reimburses them monthly. During the current year, Bob reimbursed his agents $10,000 for meals and $26,000 for entertainment. How much of the reimbursement can Bob deduct for meal and entertainment expenses on his current-year federal income tax return?
A. $28,800
B. $36,000
C. $5,000
D. $30,800
$5,000
Under Sec. 162(a), an employer may deduct reimbursements to an employee subject to the restrictions of Sec. 274. There is a 50% limitation for meals when the employer does not treat the expenses as compensation, and thus Bob’s deduction for meal expenses is $5,000 ($10,000 × 50%). Entertainment expenses are no longer deductible.
Peterson, a self-employed accountant, took a client to a dinner to discuss a potential deal. The total amount paid for dinner was $125 (including a $25 tip). In addition, upon arrival, Peterson paid $15 to have his car parked. What is the total amount of deductible expenses for this meal?
A. $125
B. $140
C. $70
D. $50
$70
The amount deductible for meal expense is 50% of the actual expense. The limit also applies to the taxpayer’s own meals and related expenses, such as taxes, tips, and parking fees. Thus, $70 is the correct answer [($125 meal and tip + $15 parking) × 50%].
Which of the following statements is true concerning deduction of business meals and travel expenses?
A. Receipts must be kept for Taxpayer A’s business meal expenditure of $25.
B. Documentary evidence is required as proof for Taxpayer B’s business meal expense of $85.
C. Documentary evidence, such as receipts, is required for all of Taxpayer D’s business meal expenditures.
D. To meet the deductibility requirements, Taxpayer C must show that business income or business benefit actually resulted from each business meal expense.
Documentary evidence is required as proof for Taxpayer B’s business meal expense of $85.
Section 274(d) requires the taxpayer to substantiate by adequate records or corroborating evidence all expenditures made for travel and business meals. The IRS has denied deductions for any meal expense over $75 for which the claimant did not provide substantiating evidence, i.e., documented dates, amounts, location, purpose, and business relationship.
Bank Corp., a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. For 2020, what percentage of the meal expense may Bank deduct?
A. 0%
B. 100%
C. 50%
D. 80%
50%
Properly substantiated qualifying business meal expenses are deductible by 50% of the meal expense incurred. Since the employees are fully reimbursed for these expenses, Bank’s deduction is subject to the 50% limitation.
Mr. Smith incurred the following expenses in the current year:
Rent for a hospitality room at a convention that displayed Mr. Smith’s business products
$800
Breakfast for three of Mr. Smith’s business associates and their spouses the morning of a convention
$100
Dinners and other meals paid for by Mr. Smith in a reciprocal entertainment situation with other business associates
$300
What amount is deductible by Mr. Smith as a meal expense in the current year?
A. $550
B. $1,200
C. $25
D. $600
$25
The Tax Cuts and Jobs Act eliminated entertainment expense deductions. However, the meal expense deduction is still permitted, subject to a 50% limit. As such, only 50% of the expenses incurred related to the breakfast for three is permitted to be deducted ($50 × 50% = $25). The spouses’ meals are not deductible. The rental of the hospitality room is not a meal expense.
All of the following elements are requirements for deducting business meals EXCEPT
A. You attended the meal.
B. The meal was an ordinary expense for your business.
C. The meal was a lavish expense.
D. The meal was provided to a business consultant.
The meal was a lavish expense.
For a business meal to be deductible, the meal must
- Be an ordinary and necessary expense;
- Not be a lavish or extravagant expense;
- Be attended by the taxpayer or an employee of the taxpayer;
- Be provided to a current or potential business customer, client, consultant, or similar business contact; and
- Be separately stated from any nondeductible entertainment expense or purchased separately from the entertainment.
When an employer reimburses an employee for meals under an accountable plan while the employee is away from home, the employer must
A. Do nothing.
B. Deduct only 50% of the reimbursement on his or her tax return.
C. Add 100% of the meals as income to the employee.
D. Include 50% of the cost of meals as income to the employee.
Deduct only 50% of the reimbursement on his or her tax return.
Publication 334 states, “You can take a deduction for travel and meals expenses if you reimburse your employees for these expenses under an accountable plan. The amount you deduct for meals, however, may be subject to a 50% limit.” Meals purchased while away from home that are reimbursed by an employer are not gross income to the employee.
Which of the following elements is NOT required for business meal expenses to be deductible?
A. The meal must be provided to a business associate.
B. The meal must not be lavish.
C. The taxpayer or employee must be in attendance.
D. The taxpayer must show that business income or other business benefit resulted from each meal expense.
The taxpayer must show that business income or other business benefit resulted from each meal expense.
For a business meal to be deductible, the meal must
- Be an ordinary and necessary expense;
- Not be a lavish or extravagant expense;
- Be attended by the taxpayer or an employee of the taxpayer;
- Be provided to a current or potential business customer, client, consultant, or similar business contact; and
- Be separately stated from any nondeductible entertainment expense or purchased separately from the entertainment.
- The taxpayer is not required to verify that business income or some other business benefit resulted from each business meal expense.
Which of the following is NOT required for a business meal to be deductible?
A. The meal must take place during the taxpayer’s business hours.
B. The meal must be attended by the taxpayer or the taxpayer’s employee.
C. The meal expense must be separately stated from any entertainment expense.
D. The expense must be ordinary and necessary.
The meal must take place during the taxpayer’s business hours.
To be deductible, a meal must
*Be an ordinary and necessary expense
*Not be a lavish or extravagant expense, i.e., be reasonable based on facts and circumstances
*Be attended by the taxpayer or an employee of the taxpayer
*Be provided to a current or potential business customer, client, consultant, or similar business contact
*Be separately stated from any nondeductible entertainment expense or purchased separately from the entertainment
The time of day of the meal is not relevant.
Darlene purchased two concert tickets from a ticket agent and gave them to a client. Darlene paid $200 for the tickets, which had a face value of $75 each. Assuming that the ordinary and necessary test is met, what amount can Darlene claim as an entertainment expense?
A. $0
B. $100
C. $150
D. $200
$0
Previously, entertainment expenses associated with the active conduct of the taxpayer’s business were deductible. The amount allowable as a deduction for entertainment expenses was 50% of such expenses, limited to the face value if the amount paid is higher than face value. However, since 2018, these expenses are no longer deductible at all.
Ms. Patel, a self-employed attorney, is a member of Executive Club, which is a professional business persons’ club. Ms. Patel uses the club on a regular basis to entertain clients. Ms. Patel had the following detailed records to substantiate the expenses of Executive Club during the current year:
Dues
$2,400
Meals consisting of bona fide business discussions with clients
$2,000
Tips
$400
Transportation to/from meals
$300
What amount may Ms. Patel deduct on her income tax return for the current year?
A. $1,500
B. $5,100
C. $1,700
D. $2,600
$1,500
The expenses of a meal include amounts spent on food and tips relating to the meal. The amount allowable as a deduction for meal expenses is limited to 50% of the expenses. Transportation expenses to and from a business meal are 100% deductible. No deduction is permitted for club dues to a professional club when the principal purpose is for entertainment. Therefore, the allowable deduction is $1,500 {$300 + [($2,000 + $400) × 50%]}.
Which of the following expenses is deductible in the current year?
A. A businessman pays dues to an athletic club when membership is used for business purposes.
B. A professor of Spanish incurs travel expenses during a trip to Spain when the purpose of the trip is to increase his understanding of the language and customs of Spain.
C. A taxpayer takes a customer to lunch and discusses a business transaction immediately before the meal.
D. A taxpayer provides basketball tickets for a client and his wife as part of customer relations; the taxpayer is not present.
A taxpayer takes a customer to lunch and discusses a business transaction immediately before the meal.
The cost of a meal for a customer is considered a deductible business expense because customers fall under the business associate requirement, and the taxpayer was present at the meal. The expenditures qualify for deduction at the rate of 50% of the cost.
Partiers Unlimited sent one of its employees to attend an association meeting on behalf of the company. It is customary, and good for business, for spouses to attend these meetings and participate in the social activities in the evenings. The employee took her spouse along for this purpose. Airfare for the employee was $200, food was $100, and lodging was $200. Airfare for the spouse was $200, food was $100, and lodging was $150. Partiers reimbursed its employee for these amounts but included $450 on the employee’s W-2 as compensation at the end of the year. How much, and in what manner, should Partiers deduct for these expenses?
A. $450 as travel expense and $450 as compensation.
B. $650 as travel expense and $250 as compensation.
C. $450 as travel expense.
D. $900 as travel expense.
$450 as travel expense and $450 as compensation.
An employer may deduct reimbursements to an employee for business travel under Sec. 162(a), subject to the restrictions in Sec. 274. However, the expenses of an employee’s spouse on a trip are not deductible, unless the spouse is an employee of the taxpayer, the travel of the spouse is for a bona fide purpose, and such expenses would otherwise be deductible by the spouse [Sec. 274(m)(3)]. It is not sufficient that the spouse is along for customary social activities. Therefore, the expenses relating to the spouse in this question are not deductible.
Under Sec. 274(e), if an employer treats the nondeductible travel expenses as compensation to the employee, they may be fully deducted as compensation. Treating them as compensation requires withholding income tax, including the amounts on the employee’s W-2, and deducting them in the employer’s tax return as compensation. When the employee is reimbursed for the cost of meals and entertainment, the 50% limitation applies to the party making the reimbursement. Therefore, Partiers may deduct the following:
Spouse’s expenses as compensation $450 Employee’s expenses as travel Airfare $200 Meals ($100 × 50%) $50 Lodging $200 Deductible amount $450 If the employer chooses not to treat the spouse’s expenses as compensation, they become a nondeductible expense.
A self-employed taxpayer usually works and lives in Springfield, but in March of the current year, they start an extended engagement in Indianapolis for an indefinite period of time. How much, if any, of the following monthly expenses can the taxpayer take as an expense on their current-year tax return?
Rent
$2,500
Meals
$500
Travel – round-trip airfare to go home each weekend
$150
A. $2,900
B. $2,650
C. $0
D. $2,750
$0
According to Rev. Rul. 75-432, if the period of work is or becomes indefinite, travel expenses are not deductible because the individuals are treated as though they changed the location of their tax homes to their work location.
Which of the following statements is true regarding deductible travel expenses when attending a convention?
A. Appointment or election as a delegate to a convention is sufficient in itself to make that delegate’s travel expense deductible.
B. Travel expense for attendance at a conference on investments is deductible if the taxpayer is seeking advice on suitable investments for the production of taxable income.
C. The convention agenda does not have to deal specifically with the official duties and responsibilities of your position.
D. The daily limit on the amount that can be deducted for a convention held on a cruise ship is the highest federal per diem rate allowable at the time of travel.
The convention agenda does not have to deal specifically with the official duties and responsibilities of your position.
A deduction is allowed for ordinary and necessary traveling expenses incurred by a taxpayer while away from home in the conduct of a trade or business. The convention agenda does not have to deal specifically with the official duties and responsibilities of your position.
Mr. Pine, a self-employed engineer in Boston, traveled to Chicago in order to attend a course on new engineering techniques. He spent 2 weeks attending the course and remained in Chicago for an additional 6 weeks on personal matters. The air flight cost $200, hotel $600, meals $320, and the tuition for the course $500. How much of these expenses may Mr. Pine deduct on his return?
A. $714
B. $890
C. $500
D. $690
$690
A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business [Sec. 162(a)]. However, transportation is deductible only if the trip is primarily related to the taxpayer’s trade or business (Reg. 1.162-2). If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since Mr. Pine spent 6 out of his 8 weeks in Chicago on personal matters, the cost of the flight to Chicago is not deductible. Meals and lodging must always be allocated between personal and business. Under Sec. 274(n), business meals are deductible at only 50% of their cost. The expenses for 2 weeks out of 8 weeks are deductible. Educational expenses are deductible if the education maintains or improves skills required in the taxpayer’s business (Reg. 1.162-5). Hotel ($600 × 2/8) $150 Meals ($320 × 50% × 2/8) $40 Tuition $500 Total deduction $690
Mark is an engineer for the Peterson LTD Partnership. Peterson has an accountable travel expense plan. Mark incurred $375 in travel expenses on a 2-day business trip. When he returned to his tax home, he worked late and incurred $90 for meals. Mark gave his employer an adequate accounting within a reasonable time and did not have any excess reimbursement. What amount, if any, must be included in Mark’s W-2?
A. $0
B. $375
C. $90
D. $465
$0
The $375 is excludable from income because it was reimbursed under an accountable plan. Regulation 1.132-6(d)(2) provides that meal money provided on an occasional basis because of overtime work is excludable from income.
During the current year, Mark attended a seminar that was held on a U.S.-registered cruise ship on the Mississippi River. The seminar was directly related to his trade or business, i.e., the construction of docks and wharves on rivers such as the Mississippi. Mark incurred the following expenses while on the cruise ship:
Lodging
$2,000
Meals
$1,200
How much of the expenses incurred can Mark deduct in the current year, provided he attaches the proper statements to the current year’s tax return?
A. $3,200
B. $0
C. $2,000
D. $2,600
$2,000
A limited deduction is available for expenses incurred for conventions on U.S. cruise ships. This deduction is limited to $2,000 with respect to all cruises beginning in any calendar year. The deduction applies only if all ports of such cruise ships are located in the U.S. or in U.S. possession. Also, the taxpayer must establish that the convention is directly related to the active conduct of his or her trade or business, and the taxpayer includes certain specified information on the return.
Jane is traveling to New York from Florida for a 2-day business event. Her total flight cost is $350, and she is shipping display material for the event at a cost of $100. While in New York, Jane had dry cleaning expenses totaling $25, for which she left a $10 tip. Which of these expenses are deductible? I. Flight cost. II. Shipping cost for display material. III. Dry cleaning expense. IV. Tip left for dry cleaning.
A. I, II, III, and IV.
B. I and II only.
C. I, II, and III only.
D. I only.
I, II, III, and IV.
For travel within the U.S., expenses other than transportation (e.g., airfare) are 100% deductible if the primary purpose is business. In addition, sending baggage and sample or display material between the regular and temporary work locations, dry cleaning and laundry, and any tips paid are deductible. Note that all of these expenses must be made for business purposes when traveling away from home.
Chris, a self-employed consultant in Florida, flew to California for a 5-day trip. During the first 3 days, Chris visited several tourist attractions. Chris spent the final 2 days of the trip at a client’s office performing consulting services. The only travel expense is the $700 flight ticket. Is the flight ticket deductible?
A. Yes, the proportion related to business is deductible.
B. Yes, the full amount is deductible.
C. No, because the primary purpose of the trip is personal.
D. No, because the primary purpose of the trip is business.
No, because the primary purpose of the trip is personal.
For travel within the U.S., expenses other than transportation (e.g., airfare) are allocated based on personal or business purpose. Transportation expenses are 100% deductible if the primary purpose is business or 0% deductible if the primary purpose is personal. Because more days were spent for personal purposes than business purposes, the primary purpose of the trip is personal and Chris cannot deduct the cost of the flight.
Expenses for travel outside the United States are NOT allocated between business and personal days when
A. All of the answers are correct.
B. At least 75% of the time was spent on business.
C. A personal vacation was not a major consideration.
D. The trip was not more than 7 consecutive days.
All of the answers are correct.
Generally, traveling expenses (including meals and lodging) of a taxpayer who travels outside of the United States away from home must be allocated between time spent on the trip for business and time spent for pleasure. When the trip is for not more than 1 week or when the time spent for personal reasons on the trip is less than 25% of the total time away from home, no allocation is required.
With regard to deductible travel expenses when attending a convention, which of the following statements is false?
A. If a taxpayer establishes that a meeting held on a cruise ship is directly related to his or her trade or business, (s)he may be able to deduct up to $2,000 per year of the expenses.
B. A taxpayer cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless the meeting is directly related to his or her trade or business.
C. A taxpayer must reduce otherwise deductible travel expenses that (s)he pays by the reimbursements that (s)he receives from others for these expenses.
D. When a taxpayer’s family lives at the temporary or minor post of duty, the taxpayer may not claim travel expenses.
When a taxpayer’s family lives at the temporary or minor post of duty, the taxpayer may not claim travel expenses.
A taxpayer may deduct traveling expenses between the principal place of business and the place of business at a temporary or minor post of duty. When the taxpayer’s family lives at the temporary or minor post of duty, the taxpayer may still claim travel expenses.
With regard to deductible travel expenses when attending a convention, all of the following statements are correct EXCEPT
A. You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside of the U.S. area unless the meeting is related to your trade or business.
B. The fact that an attending individual uses vacation time does not necessarily negate the deduction.
C. If you establish that a meeting held on a cruise ship is directly related to your trade or business, you may be able to deduct expenses of up to $2,000 per trip.
D. If you can show that your attendance benefits your trade or business, you can deduct your travel expenses if the expenses are reasonable.
If you establish that a meeting held on a cruise ship is directly related to your trade or business, you may be able to deduct expenses of up to $2,000 per trip.
A limited deduction is available for expenses incurred for conventions on U.S. cruise ships. This deduction is limited to $2,000 with respect to all cruises beginning in any calendar year. Thus, $2,000 total can be deducted for cruise conventions.
Joe, a self-employed accountant, is preparing a client’s tax return. The client has brought various documents to substantiate expenses incurred while traveling. Of the following expenses, which can be deducted on Joe’s client’s tax return?
A. Travel expenses for attending investment meetings.
B. Travel expenses incurred commuting from home to work.
C. Travel expenses as a form of education.
D. Travel expenses incurred attending a convention related to the taxpayer’s business.
Travel expenses incurred attending a convention related to the taxpayer’s business.
Deductible travel expenses include those incurred when attending a convention related to the taxpayer’s business.
With regard to deductible travel expenses when attending a convention, which of the following statements is false?
A. If a taxpayer can show that his or her attendance benefits his or her trade or business, (s)he can deduct his or her and his or her family’s travel expenses providing the expenses are reasonable.
B. A taxpayer cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless the meeting is directly related to his or her trade or business.
C. A taxpayer must reduce otherwise deductible travel expenses that (s)he pays by the reimbursements that (s)he receives from others for these expenses.
D. If a taxpayer establishes that a meeting held on a cruise ship is directly related to his or her trade or business, (s)he may be able to deduct up to $2,000 per year of the expenses.
If a taxpayer can show that his or her attendance benefits his or her trade or business, (s)he can deduct his or her and his or her family’s travel expenses providing the expenses are reasonable.
Travel expenses are not allowed for a spouse, dependent, or other individual who accompanies the taxpayer on a business trip unless such person is an employee of the person who is paying or reimbursing the expenses, the travel of such person serves a bona fide business purpose, and the expenses of such person are otherwise deductible.
Phil Bobo is actively engaged in the oil business and owns numerous oil leases in the Southwest. During the current year, he made several trips to inspect oil wells on the leases and to consult about future oil wells to be drilled on these sites. As a result of these overnight trips, he paid the following: Plane fares $4,000 Hotels $1,000 Meals $800 Entertaining lessees $500 Of the $6,300 in expenses incurred, he can claim as deductible expenses
A. $5,000
B. $6,040
C. $5,400
D. $6,300
$5,400
A deduction is allowed for travel expenses while away from home in the pursuit of a trade or business [Sec. 162(a)]. Meals are deductible under Sec. 162 provided they are currently related to the active conduct of a trade or business, the expense is not lavish or extravagant under the circumstances, and the taxpayer (or an employee) is present during the meals. A deduction is allowed for the meals. Under Sec. 274(n), meal expenses are limited to 50% of their cost. Also, these expenditures must be substantiated under Sec. 274(d). Assuming that Bobo’s expenses meet the above requirements, his total deduction is as follows: Plane fares $4,000 Hotels $1,000 Meals ($800 × 50%) $400 Total deduction $5,400
Which one of the following statements concerning the recordkeeping requirements for travel and meals is true?
A. If the business purpose of a meal is not recorded, other evidence may be used to substantiate the business purpose.
B. A canceled check, by itself, is adequate evidence to support a meal expense.
C. Social Security numbers of business guests must be recorded to support entertainment expenses.
D. Receipts must be kept for all transportation expenditures over $75.
If the business purpose of a meal is not recorded, other evidence may be used to substantiate the business purpose.
Section 274(d) requires the taxpayer to substantiate by adequate records or by sufficient corroborating evidence any deduction for travel and meals.
During the current year, Dr. Unsa, a self-employed canine biologist specializing in fila dogs, attended a convention in Brazil concerning the feeding and mating habits of fila dogs. The convention was beneficial to his business since it was held in an area renowned for its abundance of fila dogs. Also, the foremost fila dog authorities in the world live there. He spent 7 full days attending the convention and 3 days sightseeing. He incurred expenses of $4,000 for airfare, $2,000 for lodging, and $1,000 for meals. How much may Dr. Unsa deduct for the trip on his Schedule C for the current year?
A. $0
B. $3,500
C. $6,500
D. $4,550
$4,550
Dr. Unsa’s deduction is limited because, although he traveled outside the United States primarily for business purposes, more than 25% of his time was spent on nonbusiness activities. Therefore, he may deduct $2,800 (70%) of the air travel costs, $1,400 (70%) of his lodging costs, and $350 of his meal expenses. The meal deduction is subject to the 50% limitation, which must be applied before the deductible amount can be figured. Thus, $1,000 meal expenses subject to the 50% limit equals $500. 70% of the $500 is deductible ($350).
With regard to deductible travel expenses when attending a convention, which of the following statements is true?
A. If the taxpayer can show that his or her attendance benefits his or her trade or business, (s)he can deduct his or her and his or her family’s travel expenses providing the expenses are reasonable.
B. The fact that the taxpayer has been appointed or elected as a delegate to a convention does not, in itself, entitle him or her to a deduction.
C. The agenda of the convention has to deal specifically with his or her official duties or responsibilities of his or her position or business.
D. If the taxpayer attends conventions, seminars, or similar meetings held on cruise ships, (s)he may be able to deduct up to $3,000 per year of the expenses if (s)he establishes that the meeting is directly related to his or her trade or business.
The fact that the taxpayer has been appointed or elected as a delegate to a convention does not, in itself, entitle him or her to a deduction.
A taxpayer’s appointment as a delegate to a convention does not, in itself, entitle the taxpayer to a deduction. A deduction is allowed for ordinary and necessary traveling expenses incurred by a taxpayer while away from home in the conduct of a trade or business.
During the current year, Dr. Water, a self-employed marine biologist specializing in sharks, attended a convention in Australia concerning the feeding and migration habits of sharks. The convention was beneficial to his business since it was held in an area renowned for its abundance of sharks. Also, the foremost shark authorities in the world live there. He spent 7 full days attending the convention and 3 days sightseeing. He incurred the following costs: $2,000 for airfare; $1,000 for lodging; and $500 for meals. How much may Dr. Water deduct for the trip on his Schedule C for the current year?
A. $3,250
B. $0
C. $1,750
D. $2,275
$2,275
Dr. Water’s deduction is limited because, although he traveled outside the United States primarily for business purposes, more than 25% of his time was spent on nonbusiness activities. Therefore, he may deduct $1,400 (70%) of the air travel costs, $700 (70%) of his lodging costs, and $175 of his meal expenses. The meal deduction is subject to the 50% limitation, which must be applied before the deductible amount can be figured. Thus, $500 meal expenses subject to the 50% limit equals $250. Seventy percent of the $250 is deductible ($175).
As a sole proprietor of a dress shop in Los Angeles, you take a business trip to Reno. On your way to Reno you stop in Las Vegas to visit a friend. You spend 3 days in Las Vegas and 6 days in Reno. Your travel expenses for the 9 days are $630. If you had not stopped in Las Vegas, the cost of your 6-day trip to Reno would have been $420. How much may be deducted before considering any meals limitation?
A. $630
B. $420
C. $580
D. None of the answers are correct.
$420
A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business [Sec. 162(a)]. However, transportation is deductible only if the trip is primarily related to the taxpayer’s trade or business (Reg. 1.162-2). If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since the taxpayer spent more days on business than personal time, the cost of the travel expenses related to business are deductible.
Lisa traveled from Philadelphia to New York on a business trip for her employer. She is not reimbursed for the travel expenses. Lisa spends 2 days in business meetings and 1 day on vacation. Lisa’s meals cost $90 ($30 per day), lodging cost $360 ($120 per day), and train fare cost $102. What is the total amount of Lisa’s business-related travel expense?
A. $0
B. $552
C. $366
D. $507
$0
The expenses of a meal include amounts spent on food and tips relating to the meal. The amount allowable as a deduction to the employer for meal expenses is limited to 50% of the expenses. Transportation expenses to and from a business meal are 100% deductible. However, as an employee, Lisa has no way to claim work-related expense deductions. The 2% of AGI miscellaneous itemized deductions was discontinued in 2017.
A taxpayer can deduct up to $2,000 per year of expenses for attending conventions, seminars, or similar meetings held on cruise ships. All of the following requirements must be met for this deduction, EXCEPT
A. The taxpayer attaches a statement signed by the taxpayer that includes information about (1) the total days of the trip; (2) the number of hours each day that the taxpayer devoted to scheduled business activities; and (3) a program of the scheduled business activities.
B. The convention, seminar, or meeting is directly related to the taxpayer’s trade or business.
C. The cruise ship company provides a statement that it has adequate facilities to accommodate the needs of the convention, seminar, or meetings.
D. The taxpayer attaches a written statement signed by an officer of the sponsoring organization or group that includes (1) a schedule of the business activities of each day of the meetings and (2) the number of hours the taxpayer attended the scheduled business activities.
The cruise ship company provides a statement that it has adequate facilities to accommodate the needs of the convention, seminar, or meetings.
The cruise ship company does not need to provide a statement that it has adequate facilities to accommodate the convention, seminar, or meetings. The following five requirements must be met for the $2,000 cruise ship deduction:
- The convention, seminar, or meeting is directly related to your trade or business.
- The cruise ship is a vessel registered in the United States.
- All of the cruise ship’s ports of call are in the United States or in possessions of the United States.
- You attach to your return a written statement signed by you that includes information about
a. The total days of the trip,
b. The number of hours each day that you devoted to scheduled business activities, and
c. A program of the scheduled business activities of the meeting. - You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes
a. A schedule of the business activities of each day of the meeting and
b. The number of hours you attended the scheduled business activities (Publication 463, page 9).
Bart, a partner in the B & A Partnership, attended the Comdex Computer Convention in Las Vegas. The partnership repairs and upgrades commercial computers for business use. At the convention, a new advanced computer hard drive was introduced that would make current machines run faster and more efficiently. Bart is responsible for purchasing hard drives for the computers used in the partnership. Bart’s travel expenses, excluding meals, were $950. Part of that amount includes a rental car of $100 incurred to visit his mother and $50 for flowers and candy he bought for her. How much is deductible as a business expense?
A. $900
B. $950
C. $800
D. $850
$800
A taxpayer may deduct ordinary and necessary expenses incurred when traveling away from home on business. A business deduction is not allowed for personal expenses. Bart must divide the total travel expenses between the business related expenses and personal expenses. He may only deduct as a business expense the business related travel expenses. Therefore, Bart may deduct $800 ($950 – $100 – $50) of the travel expenses excluding meals as a business expense.
You usually live and work in St. Louis, but you are assigned to a job in Little Rock for an indefinite period of time. How much, if any, of the following monthly expenses can you deduct? Rent $1,000 Meals $230 Travel to home one weekend $35
A. $0
B. $1,035
C. $1,265
D. $1,150
$0
According to Rev. Rul. 75-432, if the period of work is or becomes indefinite, travel expenses are not deductible because the individuals are treated as though they changed the location of their tax homes to their work location.
Willy, a self-employed laboratory consultant, flew to Buffalo where he stayed 3 days (2 days were on business). Airfare was $300. Meals were $20 per day, and lodging was $20 per day. From Buffalo, Willy flew to Toronto, Canada, where he spent 2 weeks on business and 1 week with relatives. Airfare to Toronto and back home was $600. In Toronto, food was $100 per week, and lodging was $200 per week. What is Willy’s deductible travel expense for the trip?
A. $1,920
B. $680
C. $1,260
D. $1,380
$1,260
Under Reg. 1.162-2(b), on a trip made primarily for business, the entire amount for transportation may be deducted, but the food and lodging must be allocated between business and personal time. However, under Sec. 274(c) and Reg. 1.274-4, travel outside the United States must be allocated between business and personal (including the transportation) if the travel is in excess of 1 week when more than 25% of the time is for nonbusiness activity. The airfare on the trip to Buffalo is entirely deductible, while food and lodging are deductible for only 2 days. On the trip to Toronto, the airfare must be apportioned (2/3 business) as well as the food and lodging. Under Sec. 274(n), meals are deductible at only 50% of their cost. Assuming Willy’s meals met the requirements for business meals, his business deduction is Buffalo: Airfare $300 Meals ($20 × 50% × 2 days) $20 Lodging ($20 × 2 days) $40 Toronto: Airfare ($600 × 2/3) $400 Meals ($100 × 50% × 2 weeks) $100 Lodging ($200 × 2 weeks) $400 Total travel expense deduction $1,260
Alvin, a self-employed laboratory consultant specializing in white mice, attended a convention in Paris concerning the care and feeding of white mice. The convention was held in Paris since most of the white mice specialists in the world are located in France. Alvin’s expenses were $1,600 for airfare, $400 for food, and $400 for lodging. Alvin spent 5 days at the convention and 3 days visiting friends. How much can he deduct for the trip?
A. $1,500
B. $2,400
C. $1,375
D. $0
$1,375
Section 274(h) provides that no deduction is allowed for travel expenses for a person to attend a convention held outside North America, unless the meeting is directly related to the active conduct of his or her trade or business, and it is as reasonable for the meeting to be held outside North America as within. Alvin’s convention in France will satisfy these tests. However, this trip is still subject to the rules under Sec. 274(c), which require all foreign travel for more than 1 week to be allocated between business and personal time when more than 25% of the time is spent on nonbusiness affairs. Therefore, Alvin may deduct only 5/8 of the transportation, food, and lodging expenses. Meals are limited to 50% of total cost. His deduction is as follows:
Airfare ($1,600 × 5/8) $1,000 Lodging ($400 × 5/8) $250 Meals ($400 × 50% × 5/8) $125 Total travel expense deduction $1,375
Sam Sheffield operates a cafe and files his returns on a calendar-year basis. He bought a fire insurance policy on the cafe building effective October 1, Year 1, and paid a premium of $3,600 for 2 years of coverage. How much of the premium can Sam deduct on his Year 2 return?
A. $2,400
B. $0
C. $3,150
D. $1,800
$1,800
A premium paid for insurance against losses from fire, accident, storm, theft, or other casualty is deductible if it is an ordinary and necessary expense of a business. When an insurance premium is paid in advance for more than 1 year, only a pro rata portion of the premium is deductible for each year, regardless of the taxpayer’s method of accounting. A portion of the premium paid in Year 1 is deductible in Year 2. The deductible amount is $1,800 ($3,600 premium ÷ 2 years).
The Gotham Goliaths ball club of the World Baseball League insures the life of its star center fielder, Mickey Mays, for $1 million. The annual premium is $10,000, and the Goliaths club named itself as beneficiary. The club also pays an annual premium of $5,000 for insurance to recover overhead expenses in the event of a strike by the ballgirls who retrieve foul balls and thrown bats. It also has property insurance covering the club’s chewing tobacco for which the annual premium is $1,000. What amount may the Gotham Goliaths deduct for its annual insurance premiums?
A. $0
B. $6,000
C. $1,000
D. $16,000
$6,000
Section 162(a) allows a deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. Insurance to recover overhead expenses is deductible. Property insurance is also deductible for any property owned by the business. Section 264(a) provides, however, that no deduction is allowed for premiums on a life insurance policy covering the life of an employee if the taxpayer is directly or indirectly a beneficiary. These are generally known as “key man” insurance policies. Since the Gotham Goliaths club is the beneficiary, the $10,000 premium is not deductible. Therefore, the total deduction for insurance premiums is $6,000 ($5,000 for overhead insurance and $1,000 for property insurance).
All of the following insurance premiums are ordinarily deductible as an insurance expense EXCEPT
A. Group health insurance that does not contain continuation coverage to employees.
B. Workers’ compensation on behalf of partners in a business partnership.
C. Life insurance on the life of an employee with the employee’s wife as the beneficiary.
D. Malpractice insurance covering a professional’s personal liability for negligence resulting in injury to business clients.
Workers’ compensation on behalf of partners in a business partnership.
Workers’ compensation insurance premiums paid on behalf of employees are deductible as a business expense. However, for this purpose, partners are not considered employees of the partnership (they are considered self-employed owners), and the insurance premiums on their behalf are deductible as guaranteed payments, not as an insurance expense.
John owned a small advertising company, the operations of which he included on Schedule C of his current-year individual income tax return. What type of insurance may John NOT deduct on his current-year return?
A. Fire, theft, and flood insurance.
B. Loss of earnings due to sickness or disability of John.
C. Employer’s liability insurance.
D. Overhead insurance, which pays John’s overhead expenses in the event of his long period of disability caused by his sickness or injury.
Loss of earnings due to sickness or disability of John.
A premium on a personal disability insurance policy is not deductible when it applies to insurance for the self-employed owner.
Beth is a cash-basis, calendar-year taxpayer who operates her own business. She bought a fire insurance policy on her building effective for 2 years beginning October 1, Year 1. Beth paid the $7,200 premium in January Year 2. How much of the $7,200 can Beth deduct for Year 1?
A. $900
B. $0
C. $7,200
D. $3,600
$0
A premium paid for insurance against losses from fire, accident, storm, theft, or other casualty is deductible if it is an ordinary and necessary expense of a business. However, the premiums here are not deductible until paid in Year 2 because Beth is a cash-basis taxpayer. Furthermore, the premiums will have to be apportioned over the 2-year period of the policy but cannot be deducted before they are paid.
Drew, a cash-basis, calendar-year taxpayer, runs an auto repair shop and has a self-employed insurance plan. His wife, Sherry, works for an employer who started health insurance coverage for Sherry and Drew on August 1, 2020. Drew’s net profit, before health insurance, was $50,000. Drew paid $500 a month for all 12 months in 2020 for his health insurance plan because of pre-existing illnesses. Drew and Sherry file a joint return. What is the amount of their deduction for self-employed health insurance for 2020?
A. $0
B. $6,000
C. $2,450
D. $3,500
$3,500
Self-employed individuals may deduct 100% of the health insurance costs incurred during 2020 for themselves, their spouses, and their dependents. However, Drew can make the deduction only for the 7 months of premiums wherein he was not covered under his wife’s plan. Amounts eligible for the deduction do not include amounts paid during any month or part of a month covered by the other plan. Thus, Drew and Sherry can deduct $3,500 ($500 monthly insurance payment × 7 months).
Which of the following insurance premiums is generally NOT deductible by a sole proprietorship?
A. Merchandise and inventory insurance.
B. Liability insurance.
C. Workers’ compensation insurance.
D. Life insurance with owner as beneficiary.
Life insurance with owner as beneficiary.
A taxpayer may not deduct premiums on a life insurance policy covering the taxpayer, an employee, or any person with a financial interest in the taxpayer’s business if the taxpayer is directly or indirectly a beneficiary. Insurance premiums paid on a taxpayer’s own life are personal expenses and are not deductible.
Mr. C operates a business as a calendar-year, cash-basis proprietorship. During the current year, C purchased the following insurance policies:
*One-year policy that pays C for lost earnings owing to sickness or disability effective January 1
$600
January 5
*One-year life insurance policy on a key employee of which C is beneficiary effective January 1
$360
January 5
*One-year life insurance policy on his own life taken out on June 30, required by bank for C to obtain a business loan
$240
June 30
*Two-year fire and theft policy effective December 1 of next year
$2,400
January 6
What is C’s deductible insurance expense for the current year?
A. $2,400
B. $0
C. $840
D. $360
$0
Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Insurance premiums paid for carrying on a trade or business are deductible. The 1-year policy that pays C for lost earnings is personal; thus the premiums are not deductible as a trade or business expense. The premiums paid for the 1-year life insurance policy on the key employee are not deductible since C is the beneficiary [Sec. 264(a)]. The premiums on the 1-year life insurance policy on C’s own life are also not deductible because the policy is personal even though required by the bank for C to obtain a business loan. The premiums paid on the 2-year fire and theft policy will be deductible, but not until the year the policy is effected and even then, only on an allocated basis (Publication 535, Chapter 6, “Prepayment”).
During the current year, WHOOS Partnership paid insurance premiums for the following coverage:
Use and occupancy and business interruption insurance
$2,000
Overhead insurance
$1,000
Accident and health insurance paid for its partners as guaranteed payments made to the partners
$800
Group term life insurance on the lives of all the partners with the partnership as beneficiary
$500
Life insurance on the lives of all the partners in order to get or protect a loan
$700
What is the amount of WHOOS’s deductible expense for the current year?
A. $3,700
B. $3,800
C. $5,000
D. $3,000
$3,800
Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Insurance premiums paid for carrying on a trade or business are deductible. Under the terms of a use and occupancy insurance contract, a taxpayer may be insured for the loss of the use and occupancy of property damaged by fire. This expense is deductible. Premiums paid for overhead insurance are also deductible. Guaranteed payments are recorded as income by the partners and are deductible by the partnership. The deduction for the group term life insurance is not available because the partnership is the beneficiary. Finally, insurance premiums paid on a taxpayer’s own life are personal expenses and are not deductible. Therefore, the amount of WHOOS’s deductible expense for the current year is $3,800 ($2,000 business interruption insurance + $1,000 overhead insurance + $800 accident and health insurance).
The J & M partnership paid liability insurance on its building of $2,200 for the year 2020. This represents a premium for 1 year. J & M also prepaid fire insurance premiums of $2,400. The premium paid was for 2020 and 2021. What is the amount of insurance that J & M may deduct for 2020?
A. $4,600
B. $2,400
C. $3,400
D. $2,200
$3,400
An ordinary and necessary trade or business insurance expense paid or incurred during the tax year is deductible, including fire insurance and liability insurance. Prepaid insurance expenses must be apportioned over the period of coverage. Therefore, the 2020 portion of the premium paid for fire insurance is $1,200 ($2,400 ÷ 2 years). The total amount of insurance deductible for 2020 is $3,400 ($2,200 + $1,200).
