Chapter 9 Reading Notes

Question 1

Considering the large number of taxpayers affected, the tax treatment of jobrelated
expenses is unusually complex. To resolve this matter in a systematic fashion,
a number of key questions must be asked:

Answer 1

• Is the taxpayer an employee or self-employed?
• If an employee, what expenses qualify as deductions?
• How are the expenses that qualify classified for tax purposes?
• To the extent the expenses are classified as deductions from AGI, are they subject
to any limitation?

Question 2

Unlike employees, selfemployed
persons do not have to be included in various fringe benefit programs
(e.g., group term life insurance and retirement plans). Because they are not covered
by FICA and FUTA (see Chapter 1), these payroll costs are __________ The IRS
is very much aware of the tendency of businesses to wrongly classify workers as selfemployed
rather than as employees.

Answer 2

avoided

Question 3

Expenses of self-employed taxpayers,

to the extent allowable, are classified as

Answer 3

deductions for AGI

Question 4

With the
exception of reimbursement under an accountable plan (see later in the chapter),
expenses of employees are

Answer 4

deductions from AGI

Question 5

But when does a common law employee-employer relationship exist? Such a
relationship exists when the employer

Answer 5

has the right to specify the end result and
the ways and means by which that result is to be attained. An employee is subject
to the will and control of the employer with respect not only to what shall be done
but also to how it shall be done

Question 6

If the individual is subject to the direction or control
of another only to the extent of the end result but not as to the means of
accomplishment, an employee-employer relationship exists.

Answer 6

False it does not exist

Question 7

Certain factors indicate an employee-employer relationship. These include the
performance of the following by the employer. What are they?

Answer 7

• Furnishing of tools or equipment and a place to work.
• Providing support services, including the hiring of assistants to help do the
work.
• Making training available to provide needed job skills.
• Allowing participation in various workplace fringe benefits (e.g., accident and
health plans, group life insurance, and retirement plans).
• Paying for services based on time rather than the task performed

Question 8

An independent contractor is

Answer 8

self-employed

Question 9

When one taxpayer holds multiple jobs, Is it possible to have dual status as both
an employee and an independent contractor (i.e., self-employed).

Answer 9

Yes

Question 10

Certain workers who are not common law employees are treated as employees for
employment tax purposes. Known as

Answer 10

statutory employees

Question 11

statutory employees include?

Answer 11

certain
drivers (e.g., nondairy beverage distributors and laundry and dry cleaning pickup service),
life insurance sales agents, home workers, and other sales persons

Question 12

These employees

are allowed to claim their business-related expenses as

Answer 12

deductions for AGI

Question 13

Once the employment relationship is established, employee expenses fall into one
of the following categories:

Answer 13

• Transportation.
• Travel.
• Moving.
• Education.
• Entertainment.
• Other.

Question 14

An employee may deduct unreimbursed employment-related transportation
expenses as an

Answer 14

itemized deduction from AGI.

Question 15

include only
the cost of transporting the employee from one place to another in the course of
employment when the employee is not away from home in travel status. Such costs
include taxi fares, automobile expenses, tolls, and parking.

Answer 15

transportation expenses

Question 16

Is commuting between home to the place you work deductible.

Answer 16

Nope. Commuting between home and one’s place of employment is a personal, nondeductible
expense. The fact that one employee drives 30 miles to work and another
employee walks six blocks is of no significance

Question 17

If an employee would drives heavy tools to work from home would this be deductible?

Answer 17

Yes only if the reason he’s driving to work is to get the tools there. but only for the
additional costs incurred to transport the work implements. Additional costs are
those exceeding the cost of commuting by the same mode of transportation without
the tools.

Question 18

The

expenses of getting from one job to another are deductible or nondeductible?

Answer 18

deductible

Question 19

Norman is the local manager for a national chain of fast-food outlets. Each workday, he E X A M P L E 6
drives from his home to his office to handle administrative matters. Most of his day, however,
is then spent making the rounds of the retail outlets, after which he drives home. Are the costs deductible.

Answer 19

Nope

Question 20

If the taxpayer is required to incur a transportation expense to travel between
workstations, that expense is

Answer 20

deductible

Question 21

Likewise, the commuting costs from home to a temporary workstation and from
the temporary workstation to home are

Answer 21

deductible

Question 22

reasonable travel cost between the general working area

and a temporary workstation outside that area deductible or non-deductible

Answer 22

deductible

Question 23

if an employee customarily works on several

temporary assignments in a localized area, that localized area commuting expenses are

Answer 23

non-deductible

Question 24

A taxpayer has two choices in determining automobile expenses

Answer 24

the automatic

mileage method and the actual cost method

Question 25

If a mixed-use automobile is involved, only the expenses attributable to the business use are deductible. The percentage of business use is usually arrived at by

Answer 25

comparing the business mileage with total | mileage—both business and personal.

Question 26

Also called the ______ _______ ______, the automatic mileage method is convenient in that it simplifies record keeping.

Answer 26

standard mileage method

Question 27

For 2012, the deduction is based on? How do you find the deduction using the automatic mileage method?

Answer 27

For 2012, the deduction is based on 55.5 cents per mile for business miles

Question 28

The automatic mileage rate for deductible education expenses is the same as for business?

Answer 28

True

Question 29

23 cents per mile is allowed for

Answer 29

moving (discussed later in this chapter) | and medical purposes,

Question 30

and the rate for the charitable contribution deduction is

Answer 30

14 | cents a mile (as to medical and charitable deductions, see Chapter 10)

Question 31

Parking | fees and tolls are allowed in addition to expenses computed using the

Answer 31

automatic | mileage method

Question 32

Generally, a taxpayer may elect either method for any particular year. However, the following restrictions apply:

Answer 32

• The vehicle must be owned or leased by the taxpayer. • The vehicle is not used for hire (e.g., taxicab). • If five or more vehicles are in use (for business purposes) at the same time (not alternately), a taxpayer may not use the automatic mileage method. • A basis adjustment is required if the taxpayer changes from the automatic mileage method to the actual operating cost method. Depreciation is considered allowed for the business miles in accordance with the following schedule for the most recent five years:

Question 33

Rate per mile table

Answer 33

on page 9-7

Question 34

Use of the automatic mileage method in the first year the auto is placed in service is considered an election to exclude the auto from the

Answer 34

MACRS method of depreciation

Question 35

A taxpayer may not switch to the automatic mileage method if the MACRS statutory percentage method or the election to expense under

Answer 35

§ 179 has been used

Question 36

Actual Cost Method Under this method, the actual cost of operating the automobile is used to compute the deduction. Actual costs include the following expenses:

Answer 36

* Gas and oil, lubrication. * Depreciation (or lease payments). * Insurance. * Dues to auto clubs. * Repairs. * Tires and other parts. * Licenses and registration fees. * Parking and tolls.

Question 37

In mixed-use situations, the portion of the sales tax attributable to personal use may, in some cases, be claimed as a

Answer 37

deduction from AGI

Question 38

A deduction for parking tickets | and other traffic violations is allowed?

Answer 38

False

Question 39

unreimbursed travel expenses related to a taxpayer’s employment are written off as

Answer 39

itemized deduction.

Question 40

Travel expenses are more broadly defined in the Code than | are transportation expenses. Travel expenses

Answer 40

include transportation expenses and meals and lodging while away from home in the pursuit of a trade or business. Meals cannot be lavish or extravagant under the circumstances.

Question 41

Transportation expenses (as previously discussed) are deductible even though the taxpayer is not away from home?

Answer 41

True

Question 42

A deduction for travel expenses is available only if

Answer 42

the taxpayer is away from his or her tax home. Travel expenses also include reasonable laundry and incidental expenses.

Question 43

The crucial test for the deductibility of travel expenses is whether? What must be met in order for any travel expenses to even be realized let alone be deducted?

Answer 43

The crucial test for the deductibility of travel expenses is whether the employee is away from home overnight. “Overnight” need not be a 24-hour period, but it must be a period substantially longer than an ordinary day’s work and must require rest, sleep, or a relief-from-work period.11 A one-day business trip is not travel status, and meals and lodging for such a trip are not deductible.

Question 44

If the taxpayeremployee is reassigned to a new post for an indefinite period of time, that new post becomes

Answer 44

his or her tax home and expenses are not deductible travel expenses.

Question 45

Malcolm’s employer opened a branch office in San Diego. Malcolm was assigned to the new office for three months to train a new manager and to assist in setting up the new office. He tried commuting from his home in Los Angeles for a week and decided that he could not continue driving several hours a day. He rented an apartment in San Diego, where he lived during the week. He spent weekends with his wife and children at their home in Los Angeles. Malcolm’s rent, meals, laundry, incidentals, and automobile expenses in San Diego are deductible or non-deductible

Answer 45

deductible.

Question 46

Assume that Malcolm in Example 12 was transferred to the new location to become the new manager permanently. His wife and children continued to live in Los Angeles until the end of the school year. Are his travel expenses deductible

Answer 46

No because the assignment is not temporary. His travel expenses are not deductible. He's no longer away from home

Question 47

To curtail controversy in this area, the Code specifies that a taxpayer “shall not be treated as temporarily away from home during any period of employment if such period exceeds

Answer 47

1 year

Question 48

Jim is single and works full-time as a long-haul truck driver. He lists his mother’s home E X A M P L E 1 4 as his address and stays there during holidays. However, he contributes nothing toward its maintenance. Because Jim has no regular place of duty or place where he regularly lives, his tax home is where he works (i.e., on the road). Are his meals and lodging deductible?

Answer 48

No. he is never away from home, and all of his meals and lodging while on the road are personal and not deductible

Question 49

Dr. Hill, a pathologist who works for a hospital in Ohio, travels to Las Vegas to attend a two-day session on recent developments in estate planning. Are deductions allowed?

Answer 49

No

Question 50

Assume the same facts as in Example 16, except that the convention deals entirely with recent developments in pathology. Are travel deductions allowed?

Answer 50

Yes

Question 51

A CPA is unable to attend a convention at which current developments in taxation are discussed. She pays $200 for videotapes of the lectures and views them at home later. The $200 is

Answer 51

an itemized deduction if the CPA is an employee. If she is self-employed, the $200 is a deduction for AGI.

Question 52

Is travel as a form of eduction deductible?

Answer 52

No If, however, the education qualifies | as a deduction, the travel involved is allowed.

Question 53

In the current year, Hana travels from Seattle to New York primarily for business. She E X A M P L E 2 2 spends five days conducting business and three days sightseeing and attending shows. Her plane and taxi fare amounts to $1,160. Her meals amount to $200 per day, and lodging and incidental expenses are $350 per day. What are deductions?

Answer 53

She can deduct the transportation charges of $1,160, because the trip is primarily for business (five days of business versus three days of sightseeing). Meals are limited to five days and are subject to the 50% cutback (discussed later in the chapter), for a total of $500 [5 days × ($200 × 50%)], and other expenses are limited to $1,750 (5 days × $350). If Hana is an employee, the unreimbursed travel expenses are miscellaneous itemized deductions. n

Question 54

When the trip is outside the United States, special rules apply. Transportation expenses must be allocated between business and personal unless what 2 things

Answer 54

(1) the taxpayer is away from home for seven days or less or (2) less than 25 percent of the time was for personal purposes.

Question 55

No allocation is required if

Answer 55

the taxpayer has no substantial control over arrangements for the trip or the desire for a vacation is not a major factor in taking the trip. If the trip is primarily for pleasure, no transportation charges are deductible.

Question 56

Weekends, | legal holidays, and intervening days are considered business days if?

Answer 56

both the preceding and succeeding days were business days.

Question 57

Moving expenses are deductible for moves in connection with

Answer 57

the commencement of work at a new principal place of work.19 Both employees and self-employed individuals can deduct these expenses

Question 58

To be eligible for a moving expense deduction, | a taxpayer must meet two basic tests:

Answer 58

distance and time

Question 59

To meet the distance test, the taxpayer’s new job location must be

Answer 59

at least 50 miles farther from the taxpayer’s old residence than the old residence was from the former place of employment

Question 60

To meet the distance test, the taxpayer’s new job location must be. Give answer in english

Answer 60

distance from old house to new job must be 50 miles more than distance from old house to old job.

Question 61

To meet the time test, an employee must be

Answer 61

employed on a full-time basis at the | new location for 39 weeks in the 12-month period following the move.

Question 62

If the taxpayer | is a self-employed individual, he or she must

Answer 62

work in the new location for 78 | weeks during the next two years. The first 39 weeks must be in the first 12 months

Question 63

“Qualified” moving expenses include reasonable expenses of what two things?

Answer 63

* Moving household goods and personal effects. | * Traveling from the former residence to the new place of residence.

Question 64

Jill is transferred by her employer from the Atlanta office to the San Francisco office. E X A M P L E 2 7 In this connection, she spends the following amounts: Cost of moving furniture $4,800 Transportation 700 Meals 450 Lodging 600 Jill’s total qualified moving expense is

Answer 64

6,100 ($4,800 + $700 + $600).

Question 65

An employee can deduct expenses incurred for education (education expenses) as ordinary and necessary business expenses provided the expenses are incurred for either of two reasons:

Answer 65

• To maintain or improve existing skills required in the present job. • To meet the express requirements of the employer or the requirements imposed by law to retain his or her employment status.

Question 66

Education expenses are not deductible if the education is for either of the following purposes (except as discussed under A Limited Deduction Approach, which follows):

Answer 66

• To meet the minimum educational standards for qualification in the taxpayer’s existing job. • To qualify the taxpayer for a new trade or business.