Business Deductions

Question 1

David is an interstate truck driver subject to Department of Transportation hours of service, but he is not an employee. In 2019, he is allowed to deduct what percent of his meals he had while working as an interstate truck driver?
A.	75%
B.	80%
C.	0%
D.	50%

Answer 1

80%
Answer (B) is correct.
Transportation workers who are subject to Department of Transportation hours and service rules are allowed to deduct 80% of the cost of meals consumed while away from home (Publication 463).

Question 2

Which one of the following is a deductible transportation expense?
A. Use of a vehicle by a self-employed taxpayer to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work.
B. Hauling tools and equipment in a vehicle while commuting to and from a regular place of work.
C. Use of vehicles by Armed Forces Reservists to attend weekend meetings in the general area of their homes.
D. Use of a vehicle which displays material that advertises one’s business while commuting to and from work.

Answer 2

Use of a vehicle by a self-employed taxpayer to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work.
Answer (A) is correct.
A self-employed taxpayer is permitted a deduction for transportation expenses paid in connection with services performed for the taxpayer’s trade or business. The use of a vehicle to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work would qualify as a deductible transportation expense. The transportation expense deduction also includes the cost of any travel by a taxpayer having a regular place of business between home and temporary work stations, regardless of the distances (Publication 463). Thus, not only the costs for assignments beyond a general area mentioned in this answer choice, but also costs related to assignments in the same metropolitan area of one’s regular place of business are now deductible.

Question 3

Cindy is a salesperson employed by a window manufacturing company, and she travels to various locations to sell her products. She drives 12,000 miles a year. She adequately accounts to her employer for her business expenses. Her employer reimburses her $4,200 for the mileage driven at 35 cents per mile. Based on the standard mileage rate of 58 cents per mile, her expense was $6,960. Cindy is entitled to deduct on Schedule A, Itemized Deductions, transportation expenses of
A. $0, because the unreimbursed expenses of an employee are nondeductible.
B. $6,960, since she can claim the standard mileage rate.
C. $4,200, since she was reimbursed for that amount.
D. $2,760, as excess expense over the reimbursed expense.

Answer 3

$0, because the unreimbursed expenses of an employee are nondeductible.
Answer (A) is correct.
The former allowance for employees to deduct unreimbursed expenses on Schedule A ended in 2017.

Question 4

Phillip 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.	$5,400
C.	$5,800
D.	$6,300

Answer 4

$5,400
Answer (B) is correct.
A deduction is allowed for travel expenses while away from home in the pursuit of a trade or business. Meals are deductible under the tax code 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. Entertainment expenses are nondeductible. Meal expenses are limited to 50% of their cost. Also, all these expenditures must be substantiated (Publication 463). Assuming that Phillip’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

Question 5

Monte operates a landscaping business. He drives a pick-up to various work sites and to get materials. His employees use three other pick-ups plus a truck to deliver materials and to travel to work sites. His mileage on the five vehicles for the year totaled 200,000 miles. The mileage is incurred ratably throughout the year and is supported by mileage logs. The actual expense of operating all five vehicles was $90,000 for fuel, repairs, etc. He also spent $600 on tolls. During the year, Monte paid $4,000 in interest on vehicle loans. All five vehicles are parked at the business site when not in use in the business. They are not available for personal use. Ignoring any possible depreciation deduction and knowing the mileage rate for the year is $.58, how much of Monte’s vehicle-related expense is currently deductible?
A.	$94,600
B.	$120,600
C.	$116,000
D.	$116,600

Answer 5

$94,600
Answer (A) is correct.
If the taxpayer owns five or more cars that are used for business at the same time (i.e., a fleet), (s)he cannot use the standard mileage rate of $.58 for the business use of any car. Therefore, Monte must use actual automobile expenses for his deduction. The cost of operating cars used for business includes the following: gas and oil, lubrication and washing, repairs, garage and parking, insurance, and tires and supplies. Tolls and interest expense allocable to the cars are deductible. Therefore, Monte may deduct $94,600 for his actual vehicle related expenses (Publication 463).

Question 6

Betty Brunett, an employee who is single, spent $2,000 in unreimbursed business expenses associated with her $20,000 annual salary. Included in those expenses were $1,000 of travel and $1,000 of dues and subscriptions. Because of $5,000 of interest expense on her home, she will be filing Schedule A of Form 1040. In the current year, how much of her $2,000 expenses will be deductions “for” and “from” AGI?

For

From

A.	
$0       
$0       
B.	
$1,000
$1,000
C.	
$0       
$1,600
D.	
$1,000
$600

Answer 6

$0
$0
Answer (A) is correct.
Unreimbursed business expenses of an employee are nondeductible. None of the expenses are deductible for adjusted gross income.

Question 7

Which of the following is NOT true with respect to an employer’s accountable plan for the reimbursement of employee travel, gift, and care expenses?
A. If the plan calls for actual expense reimbursement but excess reimbursement paid to an employee has been returned, the employer must include the excess amount as wages on Form W-2.
B. If the plan calls for actual expense reimbursement, adequate accounting is made, and the excess returned, no amount is reported as taxable income on Form W-2.
C. If the plan calls for a per diem allowance amount in excess of the federal rate but the employee adequately accounts for the expenses incurred only up to the federal rate and does not return excess reimbursements, the employer must include the excess amount over the federal rates as taxable income on Form W-2 and the amount up to the federal rate in box 12, Form W-2.
D. If the plan calls for a per diem allowance up to the federal rate and the employee adequately accounts for the expenses incurred and returns any excess, no amount is included in Form W-2.

Answer 7

If the plan calls for actual expense reimbursement but excess reimbursement paid to an employee has been returned, the employer must include the excess amount as wages on Form W-2.
Answer (A) is correct.
Under the tax code, an expense reimbursement from an employer is included in gross income and reimbursed business expenses of employees for which the employee accounts to the employer (and is not eligible for any reimbursement in excess of the expenses accounted for) are deductible for adjusted gross income. But if the employee accounts to his or her employer for the expenses, the reimbursement does not have to be included in gross income (Publication 463).

Question 8

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 meal and entertainment 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 the meal and entertainment expenses on his current-year federal income tax return?
A.	$5,000
B.	$36,000
C.	$10,000
D.	$8,000

Answer 8

$5,000
Answer (A) is correct.
Under the tax code, an employer may deduct reimbursements to an employee subject to the restrictions (Publication 463). There is a 50% limitation for meals when the employer does not treat the expenses as compensation; thus, Bob’s deduction for meal expenses is $5,000 ($10,000 × 50%). The entertainment expenses are nondeductible.

Question 9

Which of the following is a deductible transportation expense for a self-employed individual?
A. Cost of round-trip transportation between an individual’s home and his client’s place of business.
B. Cost of round-trip transportation between an individual’s office and a restaurant for lunch.
C. Cost of round-trip transportation between an individual’s home and a temporary training site in the same city.
D. Cost of round-trip transportation between an individual’s home and office while conducting business on his cell phone.

Answer 9

Cost of round-trip transportation between an individual’s home and a temporary training site in the same city.
Answer (C) is correct.
A self-employed individual is permitted a deduction for transportation expenses paid in connection with services performed for a trade or business. The use of a vehicle to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work would qualify as a deductible transportation expense. The tax code has extended the transportation expense deduction to include the cost of any travel by a taxpayer having a regular place of business between home and temporary work stations, regardless of the distances (Publication 463).

Question 10

Which of the following is considered a nonbusiness bad debt?
A. None of the answers are correct.
B. Tom, a CPA, made personal loans to several friends who were not his clients. Three of the loans became totally worthless.
C. Mary obtained a court order for her former husband, Bill, to pay child support. Bill did not pay the child support.
D. Kirby guaranteed a loan as a gesture of friendship for Sue. Sue defaulted and Kirby paid off the loan.

Answer 10

Tom, a CPA, made personal loans to several friends who were not his clients. Three of the loans became totally worthless.
Answer (B) is correct.
A loss from a business debt is an ordinary loss, while a loss from a nonbusiness debt is treated as a short-term capital loss. A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the trade or business of the taxpayer. A nonbusiness bad debt must be wholly worthless to be deducted (Publication 550). The personal loans were, by nature, not connected to Tom’s business, especially since they were not even made to clients.

Question 11

All of the following elements are part of the directly related test for business meals, EXCEPT
A. The meal took place directly before or after a business discussion.
B. You did engage in business with the person during the meal period.
C. You had more than a general expectation of getting income or some other specific business benefit.
D. The main purpose of the meal was the active conduct of business.

Answer 11

The meal took place directly before or after a business discussion.
Answer (A) is correct.
The directly related test for business meals requires the meal expense to be incurred in a clear business setting. A meal which occurs directly before or after a business discussion does not satisfy this test. It would, however, meet the requirements for the “associated with” test for business meals (Publication 463).

Question 12

Sid and Rudy co-own a lakeside cabin that they rent to vacationers whenever possible. The cabin was not used as a main home by anyone until October 1 of the current year. During the current year, the following occurred:
Rudy used the cabin for a 3-week (21-day) vacation.
Sid’s brother, Chester, rented the cabin for 2 months (61 days) at less than fair rental price.
Prior to October 1, Sid and Rudy spent a total of 26 days at the cabin working substantially full time repairing and maintaining the cabin.
Starting October 1 and continuing for the balance of the year (92 days), Sid and Rudy rented the cabin to Sid’s son, Martin, who used the cabin as his main home and paid a fair rental price.
What is the number of personal-use days that Sid will use in dividing his current-year expenses between rental-use and personal-use days?

A. 200 days.
B. 174 days.
C. 61 days.
D. 82 days.

Answer 12

82 days.
Answer (D) is correct.
A vacation home is deemed to have been used by the taxpayer for personal purposes if, for any part of the day, the home is used by
The taxpayer, any other person who owns an interest in the home, or the relatives of either
Any individual who uses the home under a reciprocal agreement whether or not rent is charged
Any individual who uses the home unless a fair rental is charged
An exception exists when a relative rents the home at a fair rental value for use as a principal residence. Sid’s personal days include the 21 days Rudy spent at the cabin and the 61 days Chester rented the cabin at less than the fair rental (Publication 527).

Question 13

George opened a 4-year certificate of deposit in January 2018. He earned $400 in interest for 2018 and reported this on his 2018 return. He withdrew all of the funds in October 2019. However, due to the premature withdrawal provisions, he received only $230 of the 2018 interest, plus $195 of interest for 2019. What should he report in 2019?
A. $195 interest income on Schedule B.
B. $25 interest income on Schedule B.
C. $170 interest expense on Schedule A and $195 interest income on Schedule B.
D. $195 interest income on Schedule B and $170 as an adjustment to gross income.

Answer 13

$195 interest income on Schedule B and $170 as an adjustment to gross income.
Answer (D) is correct.
Interest income earned must be reported in full. The $400 of interest was included in gross income in 2018. The $170 ($400 interest earned – $230 interest received) penalty is a deduction for adjusted gross income under Sec. 62(a)(9), and George will deduct it in 2019 (the year the penalty is incurred). The amount of interest earned and received for 2019 must also be reported in 2019 (Publication 550).

Question 14

Patsy lent money to Scarlett in Year 1. Scarlett signed a loan agreement and made the agreed-upon monthly payments until May of Year 3, when she stopped making payments. Patsy called Scarlett and wrote her a letter requesting payment but received no response. Then Patsy read in the newspaper that Scarlett had filed for bankruptcy with no assets. Patsy can take a deduction for a bad debt
A. Only on her timely filed Year 3 return.
B. On her timely filed Year 3 return or by amending her Year 3 return within 7 years.
C. By amending her Year 3 return within 3 years.
D. By amending her Year 1 return.

Answer 14

On her timely filed Year 3 return or by amending her Year 3 return within 7 years.
Answer (B) is correct.
A nonbusiness bad debt is defined as any debt other than one acquired in connection with the taxpayer’s trade or business. Bad debts must be deducted in the year they become worthless (Publication 550). Furthermore, the statute of limitations to take a deduction for bad debts and worthless securities is 7 years.

Question 15

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.	$500
B.	$714
C.	$890
D.	$690

Answer 15

$690
Answer (D) is correct.
A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business. However, transportation is deductible only if the trip is primarily related to the taxpayer’s trade or business. 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 (Publication 463). Educational expenses are deductible if the education maintains or improves skills required in the taxpayer’s business (Publication 17).
Hotel ($600 × 2/8)
$150
Meals ($320 × 50% × 2/8)
40
Tuition
500
Total deduction
$690

Question 16

Bob is a sole proprietor. During the year, he incurred the following expenses:
Rental payments for January and February of the next year
$3,000
Country club dues (Bob frequently entertains clients at the country club.)
7,500
Meal expenses incurred while meeting with clients
1,500
What is the amount of Bob’s expenses that are deductible for the year?
A. $4,500
B. $750
C. $8,250
D. $7,500

Answer 16

$750
Answer (B) is correct.
A deduction from gross income is allowed for meal expenses, up to 50% of the actual expense. However, entertainment expenses, such as club dues for social gatherings, are not deductible, and advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply (Publication 463). Accordingly, Bob is entitled to a deduction in the current year of $750 ($1,500 meal expenses × 50%).

Question 17

Ernest, a self-employed watchmaker, traveled to Germany in September of 2019. During his 5-day stay in Germany, he attended a 10-hour watchmaking seminar in the city of Berlin on a Monday and took a 12-hour tour of a watch manufacturing facility in Dresden on a Wednesday. The rest of the time Ernest spent hiking and touring the countryside. Ernest incurred the following costs for this trip:
Round-trip airfare of $500
Lodging of $1,000
Meals of $300
Seminar and tour registration fees of $200
In 2019, what is the amount that Ernest can deduct for travel, meals, and entertainment for this trip?

A. $2,000
B. $200
C. $1,160
D. $0

Answer 17

$1,160
Answer (C) is correct.
Generally, traveling expenses 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 a trip is for no more than 1 week, as Ernest’s was, the full cost of travel to and from the destination is deductible. The travel expenses while at the destination are still allocated between business and pleasure. Ernest will be able to deduct the entire cost of the airfare, 2/5 of the lodging, a portion of the meals, and all of the seminar and registration fees (Publication 463). The total deduction equals $1,160 [$500 + ($1,000 × 2/5) + ($300 × 1/2 × 2/5) + $200].

Question 18

In January 2019, Mr. D, who is self-employed, purchased a new automobile which he uses 100% for business. During 2019, he drove the car 14,000 miles. Mr. D also owns another automobile, which he uses occasionally for business but primarily for personal purposes. During 2019, he drove the second car 2,000 business miles. The second car is not fully depreciated. The mileage for both cars was incurred ratably throughout the year. What is the amount of Mr. D’s automobile expense deduction using the standard mileage rate?
A.	$8,120
B.	$9,280
C.	$8,720
D.	$0

Answer 18

$9,280
Answer (B) is correct.
Automobile expenses pertaining to a trade or business are deductible under the tax code as ordinary and necessary business expenses. The taxpayer may either deduct the portion of actual operating cost of the automobile attributed to business use or compute the deduction based on the standard mileage rate. For 2019, the standard mileage rate is $.58/mile for miles of business use. Mr. D’s deduction for 2019 is $9,280 (16,000 × $.58). The standard mileage rate is adjusted annually (to the extent warranted) by the IRS (Publication 463).

Question 19

With regard to rental property and personal use of vacation homes and other dwelling units, all of the following statements are true EXCEPT
A. If you rented or tried to rent property for 12 or more consecutive months, you do not count as days of personal use the days on which you used the property as your main home (either before or after offering it for rent) when determining if you used your property as a home.
B. If family members use the property for recreational purposes on the same day you spend working substantially full-time repairing and maintaining your property, the day is counted as a day of personal use.
C. If you use a dwelling unit as a home and rent it for fewer than 15 days during the year, you do not have to include any of the rent in your income, and you cannot deduct any of the rental expenses.
D. If you rent out a room in your home that is always available for short-term occupancy by paying customers, you do not use the room yourself, and you only allow paying customers to use the room, then the room is not considered to be a dwelling unit.

Answer 19

If family members use the property for recreational purposes on the same day you spend working substantially full-time repairing and maintaining your property, the day is counted as a day of personal use.
Answer (B) is correct.
The use of a dwelling for repairs and annual maintenance will not constitute personal use by the taxpayer, even if other family members use the property during the same time for recreational purposes. However, the taxpayer must engage in repairs and maintenance on a substantially full-time basis for the day (Publication 527).

Question 20

During the year, Sally Sales purchased tickets to three theater performances and two sporting events. Each event includes a meal during the event. She purchased two tickets for each event for a total of 10 tickets, each separately stating the cost of the performance/event and the meal. Sally gave these tickets away to legitimate business customers and has records to prove it. Sally did not go with these customers to the event or performance. Sally can claim
A. The tickets as a business gift expense.
B. The tickets as either a business gift expense or as a business meal expense, whichever is to her advantage.
C. The tickets as business meal expense.
D. No deduction at all since she did not attend the event with her customers.

Answer 20

The tickets as a business gift expense.
Answer (A) is correct.
Sally may only claim the tickets as a business gift expense. No business meal deduction is allowed since Sally did not attend and no business was discussed. To treat the tickets as a business gift, Sally must limit the deduction to $25 per individual donee for each year. In addition, certain other requirements, such as adequate records, must also be maintained (Publication 463).

Question 21

For purposes of the rules that apply to vacation homes and other dwelling units, consider the following information; then compute Kim’s allowable depreciation for the current year.
Days rented in the current year
120
Personal-use days
25
Gross rents received in the current year
$2,000
Expenses for the current year allocated to rental use:
Interest and taxes
$1,000
Repairs
500
Depreciation
8,000
A.	$500
B.	$0
C.	$8,000
D.	$6,400

Answer 21

$500
Answer (A) is correct.
The tax code restricts the deductions with respect to a dwelling unit used by the taxpayer as a residence. A taxpayer is deemed to use a dwelling unit as a residence if (s)he uses it for personal purposes for a number of days that exceeds the greater of 14 days or 10% of the number of days during the year for which the unit is rented at a fair rental. Since Kim rented the house for 120 days, she was allowed to use it for personal purposes for only 14 days without treating it as a residence. Therefore, Kim’s house is treated as her residence. When a dwelling unit is used by the taxpayer as a residence, the tax code disallows a deduction for expenses exceeding gross income derived from rents, reduced by deductions allowable (e.g., taxes and interest), whether or not the unit was used for rental purposes. Under the tax code, the order of deductions is (1) the allocable portion of expenses deductible regardless of rental activity, (2) deductions not affecting basis, and (3) those that do affect basis.
Gross rent
$2,000 
Interest and taxes
(1,000)
Repairs
(500)
Depreciation
(500)
Income
$       0

Question 22

During the current year, Mr. H, an employee of Corporation Z, flew to Seattle to meet with a client and incurred the following expenses that were directly related to his business:
Plane fare
$500
3 days’ lodging
400
Meals
120
Theater tickets with a face value
of $40 each for H and his client
240
Mr. H’s employer reimbursed him $500 for plane fare, $400 for lodging, and $120 for meals after Mr. H submitted the necessary accounting of his expenses. The reimbursement was not included on Mr. H’s W-2. What is the amount of the deduction Mr. H may claim on his current-year return?
A.	$64
B.	$240
C.	$0
D.	$40

Answer 22

$0
Answer (C) is correct.
No deduction will be allowed for the expenses incurred by Mr. H which were reimbursed by his employer. Therefore, no deduction will be allowed relating to the plane fare ($500), the lodging ($400), and $120 of meals. Additionally, the unreimbursed expenses of an employee are now nondeductible (Publication 17).

Question 23

Kenneth’s employer gives him $500 a month ($6,000 for the year) for his business expenses. Kenneth does not have to provide any proof of his expenses to his employer, and he can keep any funds that he does not spend. His actual expenses for the year were $1,000 for lodging, $600 for meals while away from home, and $2,000 for entertainment. What reporting is required of Kenneth’s employer, and what reporting is required of Kenneth?
A. Employer adds $6,000 to wages reported on Kenneth’s Form W-2; Kenneth reports $3,600 as a miscellaneous itemized deduction on Schedule A.
B. Employer does not include any amount in Kenneth’s Form W-2; Kenneth reports $2,400 as “Other Income” on the front of his return.
C. Employer adds $6,000 to wages reported on Kenneth’s Form W-2; Kenneth takes no deductions on Schedule A.
D. Employer adds $2,400 to wages reported on Kenneth’s Form W-2; Kenneth takes no deductions on Schedule A.

Answer 23

Employer adds $6,000 to wages reported on Kenneth’s Form W-2; Kenneth takes no deductions on Schedule A.
Answer (C) is correct.
Amounts paid under a nonaccountable plan are included in the employee’s gross income, reported on Form W-2. The unreimbursed expenses of an employee are nondeductible (Publication 463).

Question 24

With regard to business meal expenses, all of the following statements are true EXCEPT
A. A meal expense must meet one of the two tests: the “directly related” test or the “associated with” test.
B. The deductible limit on business meal expenses is 50%.
C. The cost of a Super Bowl ticket where a qualified business meal will be had during the game is deductible.
D. Club dues are not allowed as a deduction.

Answer 24

The cost of a Super Bowl ticket where a qualified business meal will be had during the game is deductible.
Answer (C) is correct.
Only the cost of the business meal is deductible, not the game ticket (Publication 463).

Question 25

Mr. Lee rents his vacation home. Given the following information, determine the correct treatment of the rental income and expenses on his current-year return: Days rented in the current year to unrelated parties at a fair rental price 56 Days used for personal purposes in the current year 18 Total income and expenses during the current year: Gross rental income $5,000 Allocated interest and taxes (4,000) Other allocated expenses (1,500) Net rental loss $ (500) A. A $500 loss should be shown on Schedule E, Form 1040. B. Mr. Lee should include none of the income or expenses from the vacation home on his current-year income tax return. C. Rental expenses (other than interest and taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to rental use. D. The interest and taxes should be shown on Schedule E, Form 1040.

Answer 25

``` Rental expenses (other than interest and taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to rental use. Answer (C) is correct. The tax code restricts the deductions with respect to a dwelling unit used by the taxpayer as a residence. A taxpayer is deemed to use a dwelling unit as a residence if (s)he uses it for personal purposes for a number of days that exceeds the greater of 14 days or 10% of the number of days during the year for which the unit is rented at a fair rental. Since Mr. Lee rented the home for only 56 days, he was allowed to use it for personal purposes for only 14 days. Thus, Mr. Lee’s deductible loss is limited. When a dwelling unit is used by the taxpayer as a residence, the tax code disallows a deduction for expenses exceeding the gross income derived from rents reduced by deductions allowable (e.g., taxes and interest), whether or not the unit was used for rental purposes. Under the tax code, the order of deductions is (1) the allocable portion of expenses deductible regardless of rental activity, (2) deductions not affecting basis, and (3) those that do affect basis (Publication 527). ```

Question 26

Which one of the following criteria is used to determine a taxpayer’s “tax home,” if the taxpayer does not have a regular or main place of business or work? A. Taxpayer has living expenses at his main home that are duplicated because his business requires him to be away from that home. B. Taxpayer performs part of his business in the area surrounding his main home and uses that home for lodging while doing business in the area. C. Taxpayer has not abandoned the area in which both his traditional place of lodging and his main home are located; members of his family live at his main home; or he often uses that home for lodging. D. All of the answers are correct.

Answer 26

All of the answers are correct. Answer (D) is correct. Three factors are used to determine where a taxpayer’s tax home is (1) taxpayer performs part of his business in the area surrounding his main home and uses that home for lodging while doing business in the area; (2) taxpayer has living expenses at his main home that are duplicated because his business requires him to be away from that home; and (3) taxpayer has not abandoned the area in which both his traditional place of lodging and his main home are located; members of his family live at his main home; or he often uses that home for lodging. If you satisfy all three factors, your “tax home” is the home where you regularly live (Publication 463).

Question 27

Elsie, a cash-basis taxpayer, had the following nonbusiness bad debts for the current year: Loan to sister-in-law to buy gifts, forgiven $ 250 Loan to neighbor made in 2014, evidenced by note 1,500 Loan to son to pay college tuition 1,200 Back rent due from tenants for 3 months 600 What is the amount Elsie may claim as nonbusiness bad debts for the current year? A. $2,100 B. $1,500 C. $1,450 D. $600

Answer 27

$1,500 Answer (B) is correct. A bad-debt deduction may be taken only for a bona fide debt arising from a valid debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. Loans to family members are usually considered to be gifts unless the taxpayer can prove that a debtor-creditor relationship and a bona fide debt existed. Here, the loan to the sister-in-law was forgiven and there is no evidence supporting a bona fide debt to the sister-in-law or the son. Therefore, the loans to the sister-in-law and son do not qualify as bona fide debts. The back rent due likewise does not qualify because Elsie is a cash-basis taxpayer and does not accrue the rent owed. The loan to the neighbor, however, does constitute a nonbusiness bad debt since it was evidenced by a note (Publication 550).

Question 28

``` Bobby, a self-employed taxpayer, spends $2,000 on baseball tickets in 2019 to take a client to a game, where they will discuss business. The tickets are all-inclusive, meaning they include food and beverages. While at the game, Bobby estimates that they receive food and beverages with a value of $500. How much of these expenses can Bobby deduct on his 2019 tax return? A. $500 B. $250 C. $1,250 D. $0 ```

Answer 28

$0 Answer (D) is correct. In general, 50% of meal expenses are deductible. However, the IRS has indicated in Notice 2018-76 that meal expenses that are not separately billed (i.e., included as part of the cost of entertainment) will be treated as nondeductible entertainment expenses.

Question 29

``` Thom is sole proprietor of a small company. He recently negotiated a substantial sale. Following the signing of the contract, Thom took the clients to dinner at a cost of $150. What is Thom’s deductible meal expense on his Schedule C for the current year? A. $150 B. $112.50 C. $0 D. $75 ```

Answer 29

$75 Answer (D) is correct. Business meals, if properly substantiated and related or associated with a business purpose, are deductible subject to a 50% limitation (Publication 463). This expense meets the associated test. The associated test states that expenses qualify if the meal is associated with trade or business and directly precedes or follows substantial business discussion.

Question 30

``` Bethany and Michael (wife and husband) are itemizing their Schedule A expenses on their 2019 return. Michael, an employee, traveled to Japan for his employer but was not reimbursed. His meal expenses totaled $500. How much can Michael deduct for meals? A. $250 B. $150 C. $500 D. $0 ```

Answer 30

$0 Answer (D) is correct. The amount deductible for meal expenses is 50% of the actual expense. The limit also applies to the taxpayer’s own meals. The expense must be directly related or associated with the active conduct of a trade or business. The predominant purpose must be the furthering of the trade or business of the taxpayer incurring the expense (Publication 463). However, the unreimbursed expenses of employees are nondeductible. Thus, Michael’s deduction is zero.

Question 31

``` In 2019, Cooper started a new business that requires him to use his car extensively for business purposes. Cooper has not claimed any depreciation on his car in the past. Cooper’s records reflect that he incurred the following expenses for 2019: Gasoline and oil $2,480 Repairs on auto 680 Business parking and tolls 120 Depreciation -- business portion 1,760 Insurance 636 Licenses, tags, etc. 80 Total $5,756 ``` ``` Total miles driven (incurred ratably throughout the year) 30,000 Business miles 24,000 What is the maximum deduction that Cooper is allowed for the business use of his car in 2019? A. $17,520 B. $13,920 C. $14,040 D. $5,756 ```

Answer 31

$14,040 Answer (C) is correct. Cooper can use the standard mileage rate authorized by the IRS, which is $.58 per business mile for 2019. Direct business (other than depreciation) expenses may be added to this, e.g., parking of $120. Use of the standard mileage rate results in $13,920 (24,000 × $.58) plus parking equals $14,040. Since this amount is greater than actual business operating costs of $4,981 [($3,876 × 80%) + $120 parking and tolls + $1,760 depreciation], $14,040 will be deducted (Publication 463).

Question 32

``` Which of the following is NOT deductible as an “actual car expense” by a taxpayer who uses that method to figure the deductible cost of operating his or her car for business purposes? A. Gas. B. Parking fines. C. Lease fees. D. Depreciation. ```

Answer 32

Parking fines. Answer (B) is correct. Automobile expenses pertaining to a trade or business are deductible under the tax code as ordinary and necessary business expenses. A deduction is allowed for expenses for gasoline, oil, tires, repairs, insurance, depreciation, licenses, and lease fees (Publication 463). A fine or a penalty paid to a government for the violation of any law is not a deductible business expense.

Question 33

Janice received $10,000 in educational assistance benefits from her employer during 2019 to reimburse her for the cost of course tuition and fees for her to earn a degree in accounting. The benefits were paid under an accountable plan and were not included in Janice’s W-2. She has a modified adjusted gross income of $80,000, and she files single. A list of Janice’s 2019 expenses follows. What is Janice’s deductible tuition and fee expense? $2,000 for an underwater basket weaving class not required for her degree $8,000 for accounting courses required for her degree $4,000 for on campus room and board $1,000 for textbooks $1,000 for lab fees for courses required for her degree A. $14,000 B. $10,000 C. $16,000 D. $0

Answer 33

$0 Answer (D) is correct. A limited amount of educational expenses is generally deductible. However, if a taxpayer receives reimbursements from his or her employer, the tax treatment depends on the employer’s reimbursements. If reimbursements equal expenses and the employee makes an accounting of the expenses to the employer, the reimbursements are excluded from the employee’s gross income, and the employee may not deduct the expenses. This is referred to as an accountable plan (Publication 463). Since Janice is accounting for her educational expenses to her employer under an accountable plan, she cannot deduct any educational expenses.

Question 34

``` Willy, 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. Willy’s expenses were $1,600 for airfare, $400 for food, and $400 for lodging. Willy spent 5 days at the convention and 3 days visiting friends. How much can he deduct for the trip? A. $1,450 B. $1,375 C. $2,400 D. $0 ```

Answer 34

``` $1,375 Answer (B) is correct. The tax code 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. Willy’s convention in France will satisfy these tests. However, this trip is still subject to the rules under the tax code, 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 (Publication 463). Therefore, Willy 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 ```

Question 35

All of the following may be deducted by a self-employed taxpayer as a transportation expense EXCEPT A. Getting from one workplace to another in the course of your business or profession. B. Commuting expenses if you work during the commuting trip using your telephone to make business calls or have business associates ride with you to and from work and you have a business discussion in the car. C. Going to a business meeting away from your regular workplace. D. Visiting clients or customers after going to your office.

Answer 35

Commuting expenses if you work during the commuting trip using your telephone to make business calls or have business associates ride with you to and from work and you have a business discussion in the car. Answer (B) is correct. A taxpayer’s costs of commuting between the taxpayer’s residence and the taxpayer’s place of business or employment generally are nondeductible personal expenses. However, the costs of going between one business location and another business location are generally deductible. A taxpayer may deduct daily transportation expenses incurred in going between the taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works. Making business calls or meeting with associates while commuting between a residence and place of business does not permit the transportation expenses to be deducted (Publication 463).

Question 36

``` During 2019, Ted, a self-employed taxpayer, drives his car 5,000 miles to visit clients, 10,000 miles to get to his office, and 500 miles to attend business-related seminars. He also spent $300 for airfare to another business (1-day) seminar and $200 for parking at his office. Using $.58 per mile, what is his deductible transportation expense? A. $3,490 B. $300 C. $9,290 D. $3,690 ```

Answer 36

``` $3,490 Answer (A) is correct. Commuting expenses between a taxpayer’s residence and a business location within the area of the taxpayer’s home are generally not deductible. In addition, the cost of parking at a taxpayer’s place of work is not deductible. However, transportation between home and a temporary work location in the same trade or business may be deducted. Thus, the transportation expenses to visit clients and the business-related seminars are all deductible (Publication 463). Mileage $3,190 (5,500 miles × $.58/mile) Airfare 300 Deductible travel costs $3,490 ```

Question 37

Jack received $3,000 in educational assistance benefits from his employer during 2019 to reimburse him for the cost of course tuition and fees for him to earn a degree. The benefits were paid under an accountable plan and were not included in Jack’s W-2. He has a modified adjusted gross income of $20,000, and he files single. A list of Jack’s 2019 expenses follows. What is Jack’s deductible tuition and fee expense? $500 for a bowling class not required for his degree $2,000 for accounting courses required for his degree $1,000 for room and board $500 for textbooks $500 for lab fees for courses required for his degree A. $4,000 B. $3,000 C. $0 D. $4,500

Answer 37

$0 Answer (C) is correct. Educational expenses are generally deductible. However, if a taxpayer receives reimbursements from his or her employer, the tax treatment depends on the employer’s reimbursements. If reimbursements equal expenses and the employee makes an accounting of the expenses to the employer, the reimbursements are excluded from the employee’s gross income, and the employee may not deduct the expenses. This is referred to as an accountable plan (Publication 463). Since Jack is accounting for his educational expenses to his employer under an accountable plan, he cannot deduct any educational expenses.

Question 38

``` Annie, a self-employed taxpayer, spends $1,000 on baseball tickets in 2019 to take a client to a game, where they will discuss business. While at the game, Annie spends $200 at the concession stand on food and drinks. How much of these expenses can Annie deduct on her 2019 tax return? A. $100 B. $200 C. $600 D. $1,200 ```

Answer 38

$100 Answer (A) is correct. Annie can deduct 50% of her meal expense. However, entertainment expenses are no longer deductible. NOTE: Notice 2018-76 indicates that the IRS intends to treat meals incurred at entertainment events as being eligible for deduction if separately billed.

Question 39

Which of the following is a false statement concerning use of the standard mileage rate in computing deductible transportation expenses? A. You must use the vehicle over 50% of the time for business. B. You may use the vehicle for hire, such as a taxi. C. You must own or lease the vehicle. D. You may use up to four cars at a time in the business.

Answer 39

You must use the vehicle over 50% of the time for business. Answer (A) is correct. The standard mileage rate is allowed under the tax code. Instead of deductions for actual costs, depreciation, etc., the standard mileage rate is deductible for business miles driven. There is no required percentage of business use of the vehicle. The standard mileage rate can be used for any occasional business use of a vehicle. The standard mileage rate is adjusted (to the extent warranted) by the IRS (Publication 463).

Question 40

For 8 months of each year, George lives in Ocala, Florida, training horses for several owners as an independent contractor and earning approximately $20,000. He rents an apartment for the 8 months. He stays in motels or rented rooms at various racetracks in other states for the other 4 months of the year during horse racing season and earns approximately $10,000. What part of George’s travel expenses can be deducted? A. Only his meals and lodging for the 4 months he is away from his tax home, Ocala. B. None of his meals or lodging because he has no tax home. C. One-third of his total meals and lodging because he is away from his tax home one-third of the year. D. All meals and lodging for the entire year.

Answer 40

Only his meals and lodging for the 4 months he is away from his tax home, Ocala. Answer (A) is correct. An individual’s tax home can be determined by the amount of time spent in an area and the relative amount of income earned there. Since George lives in Ocala 8 months and earns more of his income there, Ocala is considered his tax home. The 4 months that he is not in Ocala, he is on temporary assignment and may deduct meals and lodging expenses associated with his business travel (Publication 463).

Question 41

``` Charlie, who is self-employed, paid $2,000 for tickets to a baseball game, where he will entertain clients. What is the amount Charlie can deduct as entertainment expense after any limitations? A. $2,000 B. $0 C. $1,500 D. $1,000 ```

Answer 41

$0 Answer (B) is correct. Entertainment expenses, even if paid in connection with a trade or business, are nondeductible (Publication 463).

Question 42

Which of the following is true regarding a nonbusiness bad debt? A. It is deductible as a long-term capital loss. B. It is deductible as a short-term capital loss. C. It is deductible only if you itemize. D. It is not deductible.

Answer 42

It is deductible as a short-term capital loss. Answer (B) is correct. A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the taxpayer’s trade or business. A shareholder loan to protect his or her investment in the corporation is not treated as a business loan. A partially worthless nonbusiness bad debt is not deductible. A wholly worthless nonbusiness bad debt is treated as a short-term capital loss. This question assumes that the nonbusiness bad debt is wholly worthless. As such, it is deductible as a short-term capital loss (Publication 550).

Question 43

``` In 2019, Dan, a self-employed taxpayer, uses his car extensively for business purposes. He has not claimed any depreciation on his car in the past. Dan’s records reflect that he incurred the following expenses for 2019: Gasoline and oil $9,100 Repairs on auto 3,200 Business parking and tolls 200 Depreciation -- business portion 2,200 Insurance 795 Licenses, tags, etc. 100 Total $15,595 Total miles driven 30,000 Business miles (mileage incurred ratably throughout the year) 24,000 What is the maximum deduction that Dan is allowed for the business use of his car in 2019? A. $13,920 B. $15,595 C. $12,956 D. $14,120 ```

Answer 43

$14,120 Answer (D) is correct. Dan’s automobile expenses must be allocated between business use and personal use. One method is to take the business portion of the general expenses and add the direct business expenses. Dan’s general expenses of gas and oil, license, insurance, and repairs total $13,195. The business use of the automobile is 80% of total use (24,000 miles ÷ 30,000 miles), so the deductible part of these expenses is $10,556 ($13,195 × 80%). Parking and depreciation are direct business expenses, which total $2,400. Operating costs total $12,956. Alternatively, Dan can use the standard mileage rate authorized by the IRS, which in 2019 is $.58 per mile. Direct business (other than depreciation) expenses may be added to this, e.g., parking of $200. The standard mileage rate of $13,920 (24,000 miles × $.58) plus parking equals $14,120. Since this amount is greater than actual operating costs, $14,120 will be deducted (Publication 463).

Question 44

With respect to an employer’s reimbursement of employee business expenses, which of the following statements is NOT a requirement of an accountable plan? A. The employee must provide an accounting to the employer within a reasonable period of time. B. The employee must return any excess reimbursement or allowance to the employer within a reasonable period of time. C. The reimbursement of business meal expenditures is limited to 50% of the amount incurred. D. The expenses incurred by the employee must have a business purpose.

Answer 44

The reimbursement of business meal expenditures is limited to 50% of the amount incurred. Answer (C) is correct. The reimbursement of business meal expenditures is not limited except by their total amount. The employer can reimburse 100% of allowable meal expenses; however, the employer can deduct only 50% of the allowable business meal expenses on his or her tax return. Further, since the plan is an accountable one, the employer will not recognize the reimbursements as taxable wages, and the employee will exclude the reimbursement from income on his or her return (Publication 463).

Question 45

Mr. and Mrs. Bradshaw own a vacation home at the lake. They are trying to determine their days of personal use for the current year. Which of the following would be considered personal-use days? A. Mr. and Mrs. Bradshaw rented a mountain cabin from Lucia for 4 days in October. Lucia rented their lake house for 4 days also. They each paid a fair rental price. B. Mr. and Mrs. Bradshaw rented the house for 4 days in September to Mrs. Bradshaw’s nephew, Jacob. Jacob paid fair rental price. C. The Bradshaw’s son, Seth, rented the lake house for 30 days in December. He does not have an interest in the property, and he used it as his main home. Seth paid fair rental price. D. Mr. and Mrs. Bradshaw, their daughter, and grandchildren spent 7 days in May at the vacation home. Mr. Bradshaw spent substantially all of his time painting the interior. Mrs. Bradshaw and the others spent all of their time on recreation.

Answer 45

Mr. and Mrs. Bradshaw rented a mountain cabin from Lucia for 4 days in October. Lucia rented their lake house for 4 days also. They each paid a fair rental price. Answer (A) is correct. A vacation home is deemed to have been used by Mr. and Mrs. Bradshaw if, for any part of the day, the home is used by any individual under a reciprocal arrangement, whether or not a rental price is charged (Publication 527).

Question 46

Under which situation below is a deduction allowable for an office in a self-employed taxpayer’s home? A. You use your walk-in closet at home exclusively and regularly to bill customers, clients, or patients; to set up appointments; and to order supplies. You also rent office space downtown where you also conduct those same activities. You use the home office three days a week and the rented office space two days a week. B. You are an attorney and use a den in your home to write legal briefs. Your family also uses the den for recreation. C. Your home is the only fixed location of your business of selling mechanics’ tools at retail. You regularly use your walk-in closet for storage of inventory and product samples. You also use this area occasionally for personal purposes. D. You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities to monitor personal investments.

Answer 46

Your home is the only fixed location of your business of selling mechanics’ tools at retail. You regularly use your walk-in closet for storage of inventory and product samples. You also use this area occasionally for personal purposes. Answer (C) is correct. A deduction for depreciation is allowed if the home office is connected with a trade or business, used exclusively to conduct that business, and no other facility or location is used by the taxpayer (Publication 334). However, there are exceptions to the general rule with respect to the “exclusivity” condition. In short, the taxpayer is allowed a deduction for depreciation when the home office is also used for personal purposes provided the taxpayer is a wholesale or retail seller, and the dwelling unit is used as a storage unit for inventory or product samples, and is the taxpayer’s sole location of business. Thus, only the answer concerning the business of selling mechanics’ tools at retail is correct.

Question 47

``` Sydney is an outside salesman with a sales territory covering several states. His employer’s main office is in Milwaukee, but Sydney does not go there for business reasons. Sydney’s work assignments are temporary, and he has no way of knowing the locations of his future assignments. He often stays with a sister in Cleveland or a brother in Chicago over some weekends during the year, but he does not work in those areas. He does not pay his sister or brother for the use of the rooms. Which location is considered Sydney’s tax home? A. Milwaukee. B. Chicago. C. Sydney does not have a tax home. D. Cleveland. ```

Answer 47

Sydney does not have a tax home. Answer (C) is correct. Sydney does not have a tax home. Sydney is an itinerant since he has no established residence (Publication 463).

Question 48

``` David and Carmen were divorced in 2016. Under the final divorce decree, David was ordered to pay Carmen $800 a month for the support of their two children, who remained in the custody of Carmen. Over the next 2 years, David was very inconsistent in making child support payments to Carmen. In 2018, he missed three payments. In 2019, he made up one of the 2018 payments and missed five more payments. Assuming Carmen is a cash-basis taxpayer, what amount of nonbusiness bad debt may she claim in 2018 and 2019? A. $1,600 in 2018 and $4,000 in 2019. B. $2,400 in 2018 and $4,000 in 2019. C. $2,400 in 2018 and $3,200 in 2019. D. None in either year. ```

Answer 48

None in either year. Answer (D) is correct. A nonbusiness bad debt is any debt other than a debt that is created or acquired in the course of a trade or business of the taxpayer. Nonbusiness debt cannot be a bad debt for tax purposes unless it becomes completely worthless. Unpaid child support and alimony cannot be deducted as bad debt. The taxpayer has no basis in the obligation (Publication 550).

Question 49

Which of the following items is a deductible travel expense by self-employed taxpayers? A. Mr. D, a Pittsburgh lawyer, incurred laundry expenses while in Boston defending a client. B. Mr. A pays taxi fares to and from his job and home each day. C. Mr. C incurred an expense for meals while returning from a 6-hour business trip. D. Mr. B incurs the cost of meals on days when he services clients 15 miles from his office.

Answer 49

Mr. D, a Pittsburgh lawyer, incurred laundry expenses while in Boston defending a client. Answer (A) is correct. A deduction is allowed for travel expenses, including amounts spent for meals and lodging, while away from home in the performance of services. Travel expenses are those incurred while away from home overnight or for a period of time long enough to require a rest period. Travel expenses include transportation, meals, lodging, and expenses incident to travel, including reasonable laundry expenses, and are deductible on Schedule C for self-employed taxpayers (Publication 463).

Question 50

``` Peter owned a cottage on the lake that he bought in Year 1. In Year 2, he rented the cottage for 10 days to a stranger and used the cottage for 20 days for his own personal use. The cottage was not used the rest of the year. Peter had rental income of $1,000, and he paid $600 for repairs. How should he report these activities on his Year 2 return? A. $0 income, $0 expense. B. $667 income, $400 expense. C. $333 income, $200 expense. D. $1,000 income, $600 expense. ```

Answer 50

$0 income, $0 expense. Answer (A) is correct. When a residence is rented for less than 15 days, the rental income does not need to be reported as income. However, any corresponding rental expenses cannot be deducted (Publication 527).

Question 51

``` During the current year, Mr. Tripper, who is self-employed, paid $10,000 in membership dues to a local country club. His records reflected that he used the club as follows: Personal use 25% Directly related entertainment 40% Associated with entertainment 35% His records also show that he paid $3,000 for meals and $3,000 for entertainment, all of which were either directly related to or associated with his trade or business. How much of the dues, meals, and entertainment can Mr. Tripper deduct in the current year? A. $3,000 B. $5,250 C. $1,500 D. $6,500 ```

Answer 51

$1,500 Answer (C) is correct. The tax code 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 (Publication 463).

Question 52

``` Tammy owns a house at the beach, which she rented out from May 1 through October 31 of the current year. During April of the current year, she spent 10 days there on vacation. In November, she spent 5 days at Dionne’s mountain home and paid Dionne fair rental value. Dionne also paid Tammy a fair rental price for using her beach house for 9 days in December of the current year. Also, during November, Tammy’s grandson stayed at the beach house for 3 days without any charge. How many days would the beach house be considered to have been used for personal purposes when applying the rules to vacation homes and dwellings? A. 22 B. 13 C. 0 D. 10 ```

Answer 52

22 Answer (A) is correct. The tax code restricts the deductions with respect to a dwelling unit used by the taxpayer as a residence. A taxpayer is deemed to use a dwelling unit as a residence if (s)he uses it for personal purposes for a number of days that exceeds the greater of 14 days or 10% of the number of days during the year for which the unit is rented at a fair rental. The home is deemed to be used by the taxpayer for personal purposes if, for any part of the day, the home is used by any individual under a reciprocal arrangement, whether or not rent is charged. Similarly, the home is considered to be used for personal purposes when a relative stays at the home unless it is considered a main dwelling and a fair rental is charged (Publication 527). Therefore, Tammy’s beach house was used for personal purposes for 22 days (10 days for Tammy + 9 days for Dionne + 3 days for Tammy’s grandson).

Question 53

``` What is the total amount a sole proprietor is obligated to report on 1099-MISC forms based on the following expenses claimed on Schedule C? Incorporated law firm: $600 Sign printer: $800 ($600 labor and $200 software) Web page designer: $500 Incorporated janitorial company: $800 Consultant A: $1,000 ($400 paid in cash and $600 paid by check) Consultant B: $500 paid in cash Consultant C: $400 paid by check A. $1,400 B. $1,600 C. $2,000 D. $2,400 ```

Answer 53

$2,400 Answer (D) is correct. Form 1099-MISC is used to report payments of $600 or more to independent workers who are not the taxpayer’s employees (e.g., independent contractors) along with various other expense payments (including parts and materials) exceeding that amount. The sole proprietorship spent $600 for an incorporated law firm, $800 for a sign printer, $800 for an incorporated janitorial company, and $1,000 for Consultant A. The other payments were less than the $600 threshold and therefore not reported by the taxpayer. The following payments made to corporations generally must be reported on Form 1099-MISC. Medical and healthcare payments reported in box 6 Fish purchases for cash reported in box 7 Attorneys’ fees reported in box 7 Gross proceeds paid to an attorney reported in box 14 Substitute payments in lieu of dividends or tax-exempt interest reported in box 8 Payments by a federal executive agency for services (vendors) reported in box 7 Of the payments meeting the $600 requirement, the incorporated janitorial service is excluded because it does not meet the Form 1099-MISC reporting requirements for corporations. The total amount reported on Form 1099-MISC is $2,400 ($600 incorporated law firm + $800 sign printer + $1,000 Consultant A).

Question 54

``` Thomas loaned a friend, Susan, $10,000 for a down payment on a home. Thomas and Susan signed a note in which Susan agreed to pay $100 a month with an interest rate of 4% until the loan was completely paid. Susan lost both her job and her home in 2018. In 2019, Susan filed bankruptcy and went to live with her mother. Thomas sued Susan in court for nonpayment in August 2019, but the court ruled the debt unenforceable because it had been discharged in bankruptcy. When Susan defaulted, the outstanding balance due on the note was $7,000. If Thomas had only wage income reportable during the year, how much would his deductible bad debt be in 2019, assuming that Thomas elected to treat the loss as a nonbusiness ordinary loss arising from a transaction entered into for profit? A. $6,900 B. $3,000 C. $10,000 D. $7,000 ```

Answer 54

$3,000 Answer (B) is correct. A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the taxpayer’s trade or business. A completely worthless nonbusiness bad debt is treated as a short-term capital loss. A short-term capital loss is subject to a $3,000 annual limit. The remaining $4,000 may be carried forward (Publication 550).

Question 55

In which situation would local transportation expenses NOT be deductible for a self-employed taxpayer? A. From the regular or main job to a temporary work location. B. From the second job to a temporary work location. C. From home (residence) to the second job on your day off from your main job. D. From the regular or main job to the second job.

Answer 55

From home (residence) to the second job on your day off from your main job. Answer (C) is correct. A self-employed taxpayer is permitted a deduction for transportation expenses paid in connection with a trade or business. However, a taxpayer may not deduct the costs of commuting to and from work as a transportation expense (Publication 463).

Question 56

``` Kathy rented out her summer home for 80 days and used it personally for 20 days. She paid $1,000 for repairs and $2,000 for utilities. Rental income was $8,000. What was Kathy’s net rental income? A. $5,600 B. $8,000 C. $0 D. $5,000 ```

Answer 56

$5,600 Answer (A) is correct. If the taxpayer uses rental property for personal purposes more than the greater of (1) more than 14 days or (2) more than 10% of the number of days the property is rented, the property is considered a vacation home. Expenses of vacation homes are limited to gross income. Expenses must be allocated between the personal use and the rental use based on the number of days of use of each (Publication 527). Kathy’s rental income is $5,600 [$8,000 – ($2,000 + $1,000) × 80%].

Question 57

Which of the following is NOT a deductible transportation expense for a self-employed taxpayer? A. Cost of round-trip transportation between an individual’s home and his regular place of business, while hauling tools and equipment. B. Cost of round-trip transportation between an individual’s home and a temporary training site in a different city. C. Cost of round-trip transportation between an individual’s home and a temporary training site in the same city. D. Cost of round-trip transportation between an individual’s office and his client’s place of business.

Answer 57

Cost of round-trip transportation between an individual’s home and his regular place of business, while hauling tools and equipment. Answer (A) is correct. A self-employed taxpayer is permitted a deduction for transportation expenses paid in connection with services performed for a trade or business. The use of a vehicle to commute to and from a home and regular place of business is not deductible. This is true even if the extra costs of hauling the equipment, such as renting a trailer, could be deducted (Publication 463).

Question 58

Which of the following expenses would NOT meet the directly related test for meals? A. Dining with civic and business leaders at the opening of a new hotel for the purpose of getting business publicity. B. Restaurant owner providing an occasional free meal to a loyal customer. C. Dining with out-of-town business associates the day before the business discussion. D. Food and beverages in a hospitality room at a convention where business goodwill is created through the display of business products.

Answer 58

Dining with out-of-town business associates the day before the business discussion. Answer (C) is correct. Any meal that is conducted the day before a business discussion does not meet the directly related test. The expense must be incurred in a clear business setting with some anticipation of business benefit in order to be directly related. Meals conducted the day before a business discussion may meet the “associated with” test for meal expenses (Publication 463).

Question 59

``` When Fred loaned $2,000 to his brother in Year 1, his brother signed a note and made monthly payments until he was injured in an accident in March of Year 2. Fred is still owed $500 and his brother, who is no longer able to work, has declared bankruptcy. Fred had also guaranteed his brother’s bank loan as a favor to his brother and was required to pay off the $800 loan balance. Fred, a cash method taxpayer, is also owed $500 rent by a former tenant. How much bad debt deduction can Fred take on his Year 2 return? A. $1,000 B. $500 C. $1,800 D. $1,300 ```

Answer 59

$500 Answer (B) is correct. If you guarantee a debt that becomes worthless, you cannot take a bad debt deduction for your payments on the debt unless you can show either that your reason for making the guarantee was to protect your investment or that you entered the guarantee transaction with a profit motive. If you make the guarantee as a favor to friends and do not receive any consideration in return, your payments are considered a gift and you cannot take a deduction. The back rent due does not qualify because Fred is a cash method taxpayer and does not accrue the rent owed. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift. There cannot be a bad debt unless there is a true creditor-debtor relationship between you and the person or organization that owes you the money (Publication 550). Thus, the $500 loan qualifies as a bad debt deduction.

Question 60

Samuel, a civil engineer, drives his own vehicle to various locations to inspect bridges for safety standard requirements. His employer reimburses Samuel $400 each month for various business expenses and does not expect Samuel to provide proof of his expenses. His employer included this $4,800 reimbursement in Samuel’s 2019 W-2 as part of his wages. In 2019, Samuel incurred $3,000 in transportation expense, $1,000 in parking and tolls expense, $1,800 in car repairs expense, and $600 for expenses while attending a professional association convention. Assume Samuel uses the vehicle for business purposes only and that he maintains adequate documentation to support all of his above expenditures. What amount is Samuel entitled to deduct on his Schedule A, Itemized Deductions? A. $6,400 of expenses, subject to the 2% of adjusted gross income limitation. B. $0, since he is an employee. C. $1,600, the difference between his expenditures and what he was reimbursed. D. $4,800, since his employer follows a nonaccountable plan.

Answer 60

$0, since he is an employee. Answer (B) is correct. The former allowance for employees to deduct unreimbursed expenses on Schedule A ended in 2018.

Question 61

In order to qualify as an accountable plan for reimbursement of travel expenses, the employer plan must satisfy all of the following EXCEPT A. The employee must make an adequate and timely accounting to the employer. B. The employee must timely return any excess reimbursements. C. The employer must pay a per diem for meals. D. The expenses have a business connection.

Answer 61

The employer must pay a per diem for meals. Answer (C) is correct. For a reimbursement plan to qualify as an accountable plan, all three of the following conditions must be met: There must be a business connection to the expenses. The employee must verify or be reported to have verified the expenses. The employee must return any amounts that exceed the verified expenses. Per diem allowances for meals is a substitute plan for an accountable plan in which the company deducts a “reasonable amount” for the cost of travel expenses (Publication 463).

Question 62

Megan, an engineer, maintains a residence for herself in Phoenix, Arizona, where her employer maintains a satellite office. In 2019, Megan’s employer enrolls her in a 12-month executive training program at their corporate offices in Santa Clara, California. Megan will attend classroom training in Santa Clara and temporary work assignments throughout the United States but does not expect to return to work in Phoenix after she completes her training. Every Monday morning, she takes a commuter flight to Santa Clara. She maintains a small, one bedroom apartment in Santa Clara and incurs all the ordinary and necessary expense in the upkeep of a home. Her grandparents live in a separate residence in Phoenix, so she returns to Arizona on weekends to spend time with them and also attend to her personal affairs from her Phoenix residence. Where can Megan consider her “tax home” to be for the year 2019? A. Santa Clara, California. B. Phoenix, Arizona. C. Both, because Megan spends time in both places. D. Neither, because Megan is a transient.

Answer 62

Phoenix, Arizona. Answer (B) is correct. The following factors are used to determine a taxpayer’s tax home: The taxpayer performs part of his or her business in the area surrounding his or her main home and uses that home for lodging while doing business in the area. The taxpayer has living expenses at his or her main home that are duplicated because his or her business requires him or her to be away from that home. The taxpayer has not abandoned the area in which both his or her traditional place of lodging and his or her main home are located; members of his or her family live at his or her main home; or (s)he often uses that home for lodging. Megan’s position requires her to be away from her residence in Phoenix. Therefore, Megan’s tax home is Phoenix (Publication 463).

Question 63

``` In Year 1, Laura lent Pat $2,000. At that time, Pat signed an enforceable note agreeing to repay the $2,000. The loan was not made in the course of Laura’s business. The loan had not been repaid in Year 3 when Pat died insolvent. For Year 3, Laura should report the nonpayment of the loan as a(n) A. Ordinary loss. B. Long-term capital loss. C. Other itemized deduction. D. Short-term capital loss. ```

Answer 63

Short-term capital loss. Answer (D) is correct. A loss from a business debt is an ordinary loss, while a loss from a nonbusiness debt is treated as a short-term capital loss. A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the trade or business of the taxpayer. Therefore, when Pat died in Year 3, Laura cannot be assumed to have forgiven the loan, and the amount is not considered a gift. A short-term capital loss results (Publication 550).

Question 64

James is a sole proprietor. In May, he had the following expenses: $500 for use of a yacht for a day’s fishing with two clients $50 lunch with a client with whom he discusses a new product line $200 for dues to the country club where he plays golf with a client who provides James with 40% of his commissions $50 for a cheese package given to one of his clients on the client’s birthday What is the allowed expense deduction based on these May expenses? A. $600 B. $800 C. $50 D. $75

Answer 64

$50 Answer (C) is correct. Entertainment expenses are not deductible. Only the business meal and gift are. The meal expense must be directly related or associated with the active conduct of a trade or business. The predominant purpose must be the furthering of the trade or business of the taxpayer incurring the expense. “Directly related” means that business is actually conducted during the meal. “Associated with” means that the meal must occur directly before or after a business discussion. James is able to deduct $50 for the lunch with a client, during which he discussed a new product line, and $50 for a cheese package as a birthday present, for a total of $100 in expenses before any limitations. However, business meal expenses are only 50% deductible, and business gifts are limited to $25. The total deduction is $50 [($50 meal × 50%) + $25 gift limit].

Question 65

In all of the following situations, a self-employed individual can deduct transportation costs EXCEPT A. From a legitimate home office to a client’s place of business. B. From home to a temporary training site in the same city as the individual’s regular office. C. From one’s regular place of work to the individual’s home. D. From a place of business for client A to a place of business for client B.

Answer 65

From one’s regular place of work to the individual’s home. Answer (C) is correct. Some taxpayers are permitted a deduction for transportation expenses paid in connection with services performed for a trade or business. The use of a vehicle to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work would qualify as a deductible transportation expense. The tax code has extended the transportation expense deduction to include the cost of any travel by a taxpayer having a regular place of business between home and temporary work stations, regardless of the distances. Also, travel between clients is deductible. However, a taxpayer may not deduct the costs of commuting to and from work as a transportation expense (Publication 463).

Question 66

Which of the following statements is true? A. The deduction for business meals and entertainment is generally limited to 50%. B. Business meals and entertainment are generally nondeductible. C. The deduction for business entertainment is generally limited to 50%, and business meals are generally nondeductible. D. The deduction for business meals is generally limited to 50%, and entertainment is generally nondeductible.

Answer 66

The deduction for business meals is generally limited to 50%, and entertainment is generally nondeductible. Answer (D) is correct. In general, 50% of meal expenses are deductible. However, entertainment expenses are nondeductible.

Question 67

Sam owns a plumbing supply business that he reports as a sole proprietorship. Sam spends a great deal of time and money entertaining clients. A lot of Sam’s business is conducted in restaurants and on the golf course. In 2019, Sam incurred the following expenses: $2,000 in meal expenditures for client business dinners $300 in babysitting fees during client business dinners $1,000 in golf club membership dues $200 in golf equipment In 2019, what is the amount that Sam can deduct as business expenses? A. $2,000 B. $1,500 C. $3,000 D. $1,000

Answer 67

$1,000 Answer (D) is correct. The amount deductible for meal expenses is 50% of the actual expense. The limit also applies to the taxpayer’s own meals. Club dues for social gatherings and other entertainment expenses are not deductible. Sam may deduct 1/2 of the expenses paid for meals (Publication 463). Thus, Sam may deduct $1,000 ($2,000 × 1/2).

Question 68

Sam, an employee, uses his personal vehicle to make business deliveries. He submits the number of miles he drives to his employer and is reimbursed an amount per mile that exceeds the federal rate. Sam’s actual expenses are more than the federal rate. His employer includes the amount up to the federal rate in box 12 of Form W-2 where it is not taxable to Sam. The excess allowance is included in box 1 of the Form W-2 as wages. How should Sam report or claim this mileage? A. Deduct the excess expenses on Schedule A. B. Repay the excess to his employer. C. He cannot claim any of the expenses since his employer reimbursed him for all expenses. D. The excess expenses are nondeductible.

Answer 68

The excess expenses are nondeductible. Answer (D) is correct. If excess reimbursements are not returned, or if the employee does not substantiate them, the reimbursements are included in the employee’s gross income. However, because Sam is an employee, his unreimbursed expenses are nondeductible (Publication 463).

Question 69

Jerry, a general contractor by trade, is a tenant of Montgomery Apartments. In exchange for 4 months’ rent ($900/month), Jerry provided the following items and services for Paul, the owner of the apartments: Paint and miscellaneous supplies for the apartments $ 700 Labor for painting and miscellaneous repairs 1,000 Labor and supplies for paving the apartment parking area 1,900 How should Paul treat this transaction on his current-year Schedule E? A. Rental income of $3,600 and rental expenses of $3,600. B. Rental income of $3,600 and depreciation computed on the capital expenditures of $3,600. C. Rental income of $3,600, rental expenses of $1,700, and depreciation computed on the capital expenditures of $1,900. D. No rental income or rental expenses to be reflected on the Schedule E because the net effect is zero.

Answer 69

Rental income of $3,600, rental expenses of $1,700, and depreciation computed on the capital expenditures of $1,900. Answer (C) is correct. As a general rule, if a lessee pays any of the expenses of his or her lessor, such payments are additional rental income to the lessor. Since the expenses are in effect treated as if paid by the lessee to the lessor and then paid by the lessor to a third party, the lessor may deduct them. The $1,700 cost of painting and miscellaneous repairs is for routine maintenance costs and can be deducted as rental expenses. The $1,900 cost of paving the parking area should be capitalized and properly depreciated (Publication 527).

Question 70

``` During 2019, a self-employed taxpayer drives her car 4,000 miles to visit clients, 3,000 miles to get to her office, and 1,000 miles to attend business-related seminars. She also spent $400 for airfare to another business (1-day) seminar and $100 for parking at client offices. Using $.58 per mile, what is her deductible transportation expense? A. $5,140 B. $400 C. $3,400 D. $3,300 ```

Answer 70

``` $3,400 Answer (C) is correct. Commuting expenses between a taxpayer’s residence and a business location within the area of the taxpayer’s home are generally not deductible. However, transportation between home and a temporary work location in the same trade or business may be deducted. In addition, though parking at a taxpayer’s place of work is not a transportation deduction, parking at client offices is. Thus, the transportation expenses to visit clients, the business-related seminars, and parking at client offices are all deductible (Publication 463). Mileage $2,900 (5,000 miles × $.58/mile) Airfare 400 Parking 100 Deductible travel costs $3,400 ```

Question 71

``` On January 1, Ms. C lent $10,000 to her son to pay tuition expenses for college. Her son repaid $2,000 on July 1 and Ms. C forgave the balance upon her son’s agreement to enter her business. What is the amount and character of the loss that Ms. C may deduct on her individual income tax return? A. $0 B. $4,000 short-term capital loss. C. $4,000 long-term capital loss. D. $8,000 nonbusiness bad debt. ```

Answer 71

$0 Answer (A) is correct. A bad debt deduction may be taken only for a bona fide debt arising from a valid debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money (Publication 550). The taxpayer either made a gift to her son of the balance of the debt owed, or released the debt in consideration of her son’s agreement to enter the business. Therefore, no bad debt exists, and no deduction is available.

Question 72

``` Claire, a self-employed taxpayer, spends $1,000 on tickets in 2019 to take a client to a basketball game, where they discuss business. How much of the ticket expense can Claire deduct on her 2019 tax return? A. $1,000 B. $800 C. $0 D. $500 ```

Answer 72

$0 Answer (C) is correct. Starting in tax year 2019, entertainment expenses are no longer deductible.

Question 73

``` In the current year, Todd owned a waterfront vacation home that he used from January 1 to February 28. The rest of the year he rented the vacation home for $1,000 per month, at fair rental price. Mortgage interest for the year was $15,000 and repairs were $1,500. Depreciation was $150 for the rental period. What is the amount that is carried over to the next tax year as unused rental expenses? A. $1,650 B. $3,982 C. $150 D. $1,407 ```

Answer 73

$1,407 Answer (D) is correct. The revenue is $10,000 from rental. The interest allocated to the rental is $12,575 ($15,000 × 306/365). This interest is fully deductible in computing a rental loss for the year. The remaining interest would also be deductible (assuming the vacation home qualified as a second residence). The repairs of $1,257 ($1,500 × 306/365) plus the $150 depreciation are nondeductible because there is no income to cover it and it is carried forward to the following year. Total carryforward is $1,407 (Publication 527).

Question 74

Which of the following is NOT a deductible transportation expense for a self-employed taxpayer? A. Cost of round-trip transportation between an individual’s home and a temporary training site in the same city. B. Cost of round-trip transportation between an individual’s office and his or her client’s place of business. C. Cost of round-trip transportation between an individual’s home and office if the taxpayer is conducting business on his or her car phone. D. Cost of round-trip transportation between an individual’s qualifying office in the home and his or her client’s place of business.

Answer 74

Cost of round-trip transportation between an individual’s home and office if the taxpayer is conducting business on his or her car phone. Answer (C) is correct. A taxpayer is permitted a deduction for transportation expenses paid in connection with a trade or business. The use of a vehicle to report to and return home each evening from a temporary or minor assignment beyond the general area of one’s regular place of work would qualify as a deductible transportation expense. The transportation expense deduction also includes the cost of any travel by a taxpayer having a regular place of business between home and temporary work stations regardless of the distances. If the taxpayer’s home serves as his or her place of business, travel between his or her home and a client will not be considered personal. However, a taxpayer may not deduct the costs of commuting to and from work as a transportation expense. It is irrelevant if the taxpayer uses a phone for business during that travel (Publication 463).

Question 75

``` During the year, Mr. Bank, an independent contractor, incurred the following unreimbursed business expenses for which he has adequate proof for the amounts and purpose: Business meals $2,000 Business entertainment 1,000 Business gifts (10 gifts at $30 each to 10 different people) 300 Based on the above, what is the amount Bank can deduct? A. $1,150 B. $2,300 C. $3,300 D. $1,250 ```

Answer 75

$1,250 Answer (D) is correct. Business meal expenses, if properly substantiated and related or associated with a business purpose, are deductible subject to a 50% limitation. Thus, $1,000 of the $2,000 total meal expenses is possible for deduction. In addition, business gifts are deductible up to the amount of $25 per donee per year. A total of $250 (10 gifts to 10 different people × $25) can be deducted. The total deduction amount is $1,250 ($1,000 + $250). Entertainment expenses are no longer deductible (Publication 463).

Question 76

``` 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. What percentage of the meal expense may Bank deduct? A. 100% B. 50% C. 0% D. 80% ```

Answer 76

50% Answer (B) is correct. 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 (Publication 463).

Question 77

``` John offers his beach cottage for rent from June through August 31 (92 days). His family uses the cottage during the last 2 weeks in May (15 days). He was unable to find a renter for the first week in August (7 days). The person who rented the cottage for July allowed him to use it over a weekend (2 days) without any reduction in, or refund of, rent. The cottage was not used at all before May 16 or after August 31. Total income received was $11,000. Total expenses were $4,000. What percentage of the expenses for the cottage can John deduct as rental expenses? A. 100% B. 85% C. 83% D. 25% ```

Answer 77

85% Answer (B) is correct. When a taxpayer has a vacation home, the expenses must be allocated between personal use and rental use (Publication 527). There was a total of 100 days of usage during the year (15 days in May, 92 days from June through August 31, less 7 days unrented in August). Total days of rental were 85 days (92 days from June through August 31, less the 7 days unrented in August). The proportion of rental use is 85% (85 days of rental divided by the 100 days of total usage). The taxpayer had personal usage for the 15 days in May. The 2-day period of personal use in the cottage while it was rented at fair market value does not count as personal use.

Question 78

``` Julio pays club dues of $5,000 a year for which he is not reimbursed. He uses the club 75% for his business, 50% for directly related entertainment, and 25% for associated entertainment. How much of the club dues may Julio deduct? A. $3,750 B. $3,000 C. $0 D. $2,000 ```

Answer 78

$0 Answer (C) is correct. No deduction is allowed for amounts paid or incurred for dues and fees paid to social, athletic, sporting, or country clubs (Publication 463). A taxpayer may, however, deduct out-of-pocket expenses for the business use of those facilities that are directly related to and associated with meals with customers at the facilities. For example, purchasing a meal for the client at the club will qualify for a deduction.

Question 79

``` A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. If you incur such a loss, you may be able to deduct it as any one of the following EXCEPT A. Short-term capital loss. B. Long-term capital loss. C. Ordinary loss. D. None of the answers are correct. ```

Answer 79

Long-term capital loss. Answer (B) is correct. The tax code provides that a taxpayer incurring a loss on deposits in a bankrupt or insolvent financial institution may choose to treat the loss as an ordinary loss rather than as a nonbusiness bad debt (short-term capital loss). This treatment is allowed provided that the taxpayer is not at least a 1% owner or officer of the financial institution or related to that owner or officer (Publication 550). The taxpayer, however, is unable to treat the loss as a long-term capital loss.

Question 80

Generally, which of the following expenses paid by Kathy, a salesperson, are deductible expenses? A. Cover charges for taking a client to a nightclub. B. Country club dues where she entertains clients. C. Expenses incurred in obtaining municipal bonds. D. Weekly meals with business associates at local restaurants where business is conducted and a business benefit is expected.

Answer 80

Weekly meals with business associates at local restaurants where business is conducted and a business benefit is expected. Answer (D) is correct. According to Publication 463, a business meal must meet one of the following criteria to be considered a deductible expense: Directly related to active conduct of trade or business Associated with such business if expense occurs right before or right after a substantial and bona fide business discussion

Question 81

Landon, a sole proprietor, made the following loans during the year. Two loans were closely related to his business operation, and the other two were personal. Unrecoverable Debt ``` Written off Landon’s To Loan Amount Type Books During the Year A $2,000 Nonbusiness $1,000 B $1,000 Nonbusiness $1,000 C $3,000 Business $1,000 D $5,000 Business $2,000 The unpaid balance of each loan that is not recoverable has been written off. What is the total maximum tax deduction Landon can take for business and nonbusiness worthless debt? A. $2,000 B. $4,000 C. $3,000 D. $5,000 ```

Answer 81

``` $4,000 Answer (B) is correct. A partially worthless nonbusiness debt is not deductible, and a wholly worthless nonbusiness debt is treated as a loss from the sale or exchange of a capital asset held for 1 year or less, i.e., a short-term capital loss (Publication 550). Notice that the limit of $3,000 for a capital loss deduction is not reached in this problem since only the loan to B creates a capital loss. Partially worthless business debts may be deducted to the extent they are specifically written off (Publication 535). Landon’s bad debt deduction is A $ 0 B 1,000 C 1,000 D 2,000 Deduction $4,000 Of the loss, $1,000 is a short-term capital loss, and $3,000 is a business bad debt deduction that reduces ordinary income. ```

Question 82

Lisa, a self-employed taxpayer, travels to various locations during her work week. Using the following data, determine the number of miles she may claim as transportation expenses for this period: Monday – 40 miles, round trip, from home to her full-time job Tuesday – 20 miles from home to her full-time job, then 10 miles from her full-time job to her part-time job, then 30 miles to her home Wednesday – 60 miles, round trip, from her home to her part-time job; she did not work at her full-time job A. 60 miles. B. 10 miles. C. 40 miles. D. 160 miles.

Answer 82

10 miles. Answer (B) is correct. A taxpayer’s costs of commuting between the taxpayer’s residence and the taxpayer’s place of business are generally nondeductible personal expenses. However, the costs of going between one business location and another business location are generally deductible (Publication 463). The only miles that may be deducted as a transportation expense are the miles between Lisa’s two places of business, which is 10 miles.

Question 83

``` Paul owns a second home at the lake. During the year, he spent 3 weeks (21 days) at the lake home, rented it to his daughter for three 3-day weekends for a total of $220, and rented it to friends for 10 weeks (70 days) at fair rental value of $300 per week. His expenses for the year include Depreciation $2,000 Insurance 100 Mortgage interest 1,000 Real estate taxes 2,000 Utilities 1,000 What amount may he deduct for expenses on his Schedule E, Rental Income? A. $3,000 B. $3,220 C. $2,100 D. $4,620 ```

Answer 83

``` $3,220 Answer (B) is correct. When a taxpayer rents real property that (s)he also uses for personal property, then all or part of mortgage interest, real estate taxes, casualty losses, or other rental expenses not related to the taxpayer’s use of the unit as a home may be deducted by the taxpayer if (s)he does not occupy the property for more than the greater of 14 days or 10% of the total days it was rented to others at a fair rental price. However, if the taxpayer does not meet this requirement, (s)he may only deduct the expenses that are in proportion to the period the residence was rented. If there is still income in excess of the deductions previously listed, other expenses, including depreciation, may be deducted up to the amount of the remaining income. (Publication 527.) 70 days Rental use 21 + 9 = 30 days Personal use (use by family qualifies as personal use if they do not pay fair market value) 100 days Total use Proportion of rental use: 70/100 = .70 × 100 = 70% Proportion of expenses to be allocated to rental expenses: Mortgage interest $1,000 × 70% = $ 700 Real estate taxes $2,000 × 70% = 1,400 Insurance $ 100 × 70% = 70 $2,170 Other expenses: Depreciation $2,000 × 70% = $1,400 Utilities $1,000 × 70% = 700 $2,100 These expenses may be deducted up to the total amount of income. All rent received by the taxpayer for all persons who rented (either by discount or FMV) is income; therefore, $3,220 [($300/week × 10 weeks) + $220] is the total income from rent. Thus, $2,170 plus $1,050 of other expenses may be deducted. ```

Question 84

The 50% limit on deductibility of business-related expenses applies to which of the following: A. Employee’s reimbursed expenses under an accountable plan. B. Meals to customers at your place of business. C. Meals while traveling away from home on business. D. Meals while traveling away from home on business and meals to customers at your place of business.

Answer 84

Meals while traveling away from home on business and meals to customers at your place of business. Answer (D) is correct. The limit applies to meal expenses while traveling away from home on business and meals to customers at your place of business (Publication 463).

Question 85

In determining which place of business constitutes an individual’s tax home, all of the following factors are taken into account EXCEPT A. Total time spent at each place of business. B. The relative income earned at each place of business. C. The amount of expenses incurred at each place of business. D. The degree of business activity at each place of business.

Answer 85

The amount of expenses incurred at each place of business. Answer (C) is correct. The IRS maintains that the tax home for an individual is the location of the principal place of business for the purpose of travel expenses. When the taxpayer has two places of business, the IRS determines the principal place of business using a test based on three factors: (1) the total time spent at each place of business, (2) the degree of business activity at each place of business, and (3) the relative income earned at each place of business (Publication 463).

Question 86

Five elements must be proven with respect to business meal expenses. Two of the elements are the amount and business purpose of the expense. Which of the following is NOT one of the other three elements? A. The time/date of the meal. B. The duration of the meal. C. The place of the meal. D. The business relationship of the person(s) involved.

Answer 86

The duration of the meal. Answer (B) is correct. The tax code disallows a deduction for business meal expenses unless the taxpayer substantiates the expenditure by adequate records or corroborating evidence showing the amount, time, place, business purpose, and business relationship to the taxpayer of each person involved. The duration of the meal does not need to be disclosed (Publication 463).

Question 87

Arthur lived and worked in Florida for 8 months in 2019 and earned $30,000. He then worked in California at a seasonal job at a race track the last 4 months of the year and earned $12,000 before returning to Florida. What is Arthur’s “tax home”? A. Since Arthur was working in California at the end of the year, it is his tax home for 2019. B. Since Arthur had significant earnings at two locations, it is impossible to determine his tax home. C. Since most of his time and income were from the job in Florida, it is considered his tax home. D. Since he does not have a regular place of business, he is considered a transient and his tax home is wherever he works.

Answer 87

Since most of his time and income were from the job in Florida, it is considered his tax home. Answer (C) is correct. Publication 463 defines travel expenses as ordinary and necessary expenses of traveling away from home for your business, profession, or job. In order for a taxpayer to determine his or her traveling expenses, (s)he must determine his or her tax home. A taxpayer’s tax home is the regular place of business, regardless of where the family home is located. If a taxpayer has more than one regular place of business, his or her tax home is where the main place of business is located. When determining his or her tax home, the taxpayer must consider the following: Which place did the taxpayer spend the majority of his or her time? Which place holds the highest level of business activity? From which place did the most significant income result? Since Arthur worked more and earned significantly more in Florida, it is considered his tax home.

Question 88

Which of the following is NOT considered a day of personal use of a dwelling unit for determining if it is used as a home? A. A day on which a related person uses the dwelling unit as her main dwelling and pays fair rental value. B. A day on which an unrelated co-owner uses the dwelling unit for personal purposes. C. A day on which an unrelated person uses the dwelling unit as her main dwelling and pays less than fair rental value. D. A day on which the dwelling unit is rented to a relative at a fair rental price.

Answer 88

A day on which a related person uses the dwelling unit as her main dwelling and pays fair rental value. Answer (A) is correct. If the taxpayer rents the home at a fair rental value to any person (including a relative) for use as that person’s main dwelling, such use by that person is not considered personal use by the taxpayer (Publication 527).

Question 89

During the year, Susan received $4,800 as interest income and also paid an early withdrawal penalty of $1,200 on a certificate of deposit she had at a local bank. Which of the following is the correct way for Susan to report these items on her tax return? A. Include $4,800 interest in gross income and deduct $1,200 as an itemized deduction. B. Include $4,800 interest in gross income and deduct $1,200 as an adjustment to income. C. Include $3,600 interest in gross income. D. Include $4,800 interest in gross income.

Answer 89

Include $4,800 interest in gross income and deduct $1,200 as an adjustment to income. Answer (B) is correct. Interest income earned must be reported in full. The $4,800 of interest must be included in gross income. The $1,200 penalty is a deduction for adjusted gross income (Publication 550).

Question 90

During the year, Dan had the following expenses for his rental house: Replaced a screen in the storm door Replaced the heating system Sowed grass seed in some bare spots on the lawn Built a detached two-car garage Installed a new dishwasher Bought a welcome mat for the front stoop Which of these items must be depreciated rather than deducted as an expense on his Schedule E? A. 1, 3, 4, and 5. B. 2, 4, and 5. C. 2, 4, 5, and 6. D. 3, 4, and 6.

Answer 90

2, 4, and 5. Answer (B) is correct. The heating system, two-car garage, and new dishwasher must be depreciated instead of expensed because they add value to the rental home and must be capitalized. The replacement of a screen, sowing of grass seed, and the acquisition of a welcome mat for the front step are routine expenses (Publication 527).

Question 91

``` During the current year, Michael, a self-employed clothing consultant, drove his only car 40,000 miles, of which 32,000 miles pertained to his business. The mileage is incurred ratably throughout the year. His total operating costs and other costs were as follows: Gas and oil $12,750 Auto tag 165 Insurance 800 Repairs 4,115 Tires 300 Depreciation allocated to business use 2,000 Michael has not claimed depreciation on the car in an earlier year. What is Michael’s maximum allowable auto expense deduction for the current year using a mileage rate of $.58/mile? A. $16,504 B. $18,560 C. $20,130 D. $14,504 ```

Answer 91

$18,560 Answer (B) is correct. Michael’s automobile expenses must be allocated between business use and personal use. One method is to take the business portion of the general expenses and add the direct business expenses. Michael’s general expenses of gas and oil, tag, insurance, repairs, and tires total $18,130. The business use of the automobile is 80% of total use (32,000 miles ÷ 40,000 miles), so the deductible part of these expenses is $14,504 ($18,130 × 80%). Depreciation is a direct business expense of $2,000. Operating costs total $16,504. Alternatively, Michael can use the standard mileage rate authorized by the IRS, which in 2019 is $.58 per mile. The standard mileage rate equals $18,560 (32,000 miles × $.58). Since this amount is greater than actual operating costs, $18,560 will be deducted. (Publication 463.)