Deck 11: Individuals As Employees and Proprietors

Question 1

Carla is a deputy sheriff.Her employer requires that she live in the county where she is employed.Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing.Carla must include the housing supplement in her gross income.

Answer 1

True

Question 2

In some cases, it may be appropriate for a taxpayer to deduct work-related expenses as both a sole proprietor and an employee.

Answer 2

False

Question 3

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

Answer 3

True

Question 4

A U.S.citizen who works in France from February 1, 2019 until January 31, 2020 is eligible for the foreign earned income exclusion in 2019 and 2020.

Question 5

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

Question 6

Roger is in the 35% marginal tax bracket.Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However, Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan, he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.

Question 7

A U.S.citizen is always required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

Question 8

The work-related expenses of an independent contractor are treated as itemized deductions.

Question 9

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA), and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

Question 10

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

Question 11

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

Question 12

If an 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 employer-employee relationship does not exist.

Question 13

Employees of a CPA firm located in Maryland may exclude from gross income the meals and lodging provided by the employer while they were on an audit in Delaware.

Question 14

If an employer pays for an employee's long-term care insurance premiums, the employee can exclude from gross income the premiums, but all of the benefits collected must be included in gross income.

Question 15

Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness.The premiums for Meg's coverage were $1,800.Meg was absent from work for two months as a result of a kidney infection.Her employer's insurance company paid Meg's regular salary of $8,000 while she was away from work.Meg also collected $2,000 on a wage continuation policy she had purchased.Meg must include $11,800 in her gross income.

Question 16

The IRS will issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor.

Question 17

Janet works at Green Company's call center.If Janet's compensation is based on the number of calls she handles, she is an independent contractor.

Question 18

Nicole's employer pays her $150 per month toward the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass, $75 per month.Nicole can exclude both of these payments from her gross income.

Question 19

Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work, so they occasionally use the machine.However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use the copier.The use of the copy machine may not be excluded from gross income because the benefit is discriminatory.

Question 20

Jake performs services for Maude.If Maude provides a helper and tools, this is indicative of independent contractor (rather than employee) status.

Question 21

A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking.

Question 22

Amy lives and works in St.Louis.In the morning she flies to Boston, has a three-hour business meeting, and returns to St.Louis that evening.For tax purposes, Amy was away from home.

Question 23

A deduction for parking and other traffic violations incurred during business use of an automobile is allowed under the actual cost method but not the automatic mileage method.

Question 24

Under the automatic mileage method, depreciation is not taken into account in the mileage rate allowed.

Question 25

Bob lives and works in Newark, NJ.He travels to London for a three-day business meeting after which he spends three days touring Scotland.All of his airfare is deductible.

Question 26

Eileen lives and works in Mobile.She travels to Rome for an eight-day business meeting after which she spends two days touring Italy.All of Eileen's airfare is deductible.

Question 27

A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expenses.

Question 28

In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile.

Question 29

Once the actual cost method is used, a taxpayer cannot change to the automatic mileage method in a later year.

Question 30

After the automatic mileage rate has been set by the IRS for a year, it cannot later be changed by the IRS.

Question 31

Marvin lives with his family in Alabama.He has two jobs: one in Alabama and one in North Carolina.His tax home is where he lives (Alabama).

Question 32

For tax purposes, travel is a broader classification than transportation.

Question 33

A self-employed taxpayer who lives and works in Kansas City travels to Chicago on an eight-day business trip. While in Chicago, the taxpayer uses the hotel valet service to have some laundry done.The valet charge is a nondeductible personal travel expense.

Question 34

A taxpayer who always claims the standard deduction (i.e., does not itemize his or her deductions from AGI) may still be able to receive a tax benefit from any education expenses incurred.

Question 35

James has a job that compels him to go to many different states during the year.It is possible that he was never away from his tax home during the year.

Question 36

The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year.

Question 37

A self-employed taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of automobile club dues.

Question 38

A taxpayer who lives and works in Tulsa travels to Buffalo for five days.If three days are spent on business and two days are spent on visiting relatives, only 60% of the airfare is deductible.

Question 39

Carol is self-employed and uses her automobile solely for her business.If she uses the actual expense method to compute expenses, she can include any interest paid on the loan taken out to purchase the car.

Question 40

A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year.

Question 41

When contributions are made to a traditional IRA, they are deductible by the participant.Later distributions from the IRA upon retirement are fully taxed.

Question 42

An education expense deduction may be allowed even if the education results in a promotion or pay raise for the employee.

Question 43

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

Question 44

Jackson gives both his supervisor and her husband a $30 box of chocolates at Christmas.Jackson may claim only $25 as a deduction.

Question 45

A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction.

Question 46

For self-employed taxpayers, travel expenses are deductions for AGI.

Question 47

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

Question 48

Ethan, a bachelor with no immediate family, uses Pine Shadows Country Club exclusively for his business entertaining.All of Ethan's annual dues for his club membership are deductible.

Question 49

Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan.

Question 50

Mallard Corporation pays for a trip to Aruba for its two top salespersons.This expense is subject to the overall limitation (50%).

Question 51

For tax year 2019, Taylor used the simplified method of determining her office in the home deduction.For 2020, Taylor must continue to use the simplified method and cannot switch to the regular (actual expense) method.

Question 52

Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.

Question 53

On their birthdays, Lily sends gift certificates (each valued at $25) to Caden (a key client) and to each of Caden's two minor children.Lily can deduct only $25 for these gifts.

Question 54

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

Question 55

Flamingo Corporation furnishes meals at cost to its employees at a cafeteria it maintains.The cost of operating the cafeteria is not subject to the overall limitation (50%).

Question 56

Under the right circumstances, a taxpayer's meals and lodging expense can qualify as a deductible education expense.

Question 57

The moving expense deduction has been eliminated for all taxpayers.

Question 58

Under the regular (actual expense) method, the portion of the office in the home deduction that exceeds the income from the business can be carried over to future years.

Question 59

A taxpayer takes six clients to an NBA playoff game.If all of the tickets (list price of $120 each) are purchased on the Internet for $1,800 ($300 each), only $60 ($120 × 50% overall limitation) per ticket is deductible.

Question 60

Under the simplified method, the maximum office in the home deduction allowed is the greater of $1,500 or the office square feet × $5.

Question 61

Every year, Teal Corporation gives each employee a turkey and a bottle of wine during the December holiday season.These gifts are subject to the 50% limitation.

Question 62

One of the purposes of the qualified business income deduction was to reduce the taxes on businesses that are operating in noncorporate business forms (e.g., sole proprietors, partnerships, and S corporations).

Question 63

If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions.

Question 64

Code § 199A permits an individual to deduct 25% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

Question 65

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Question 66

Jordan performs services for Ryan.Which of the following factors, if any, indicates that Jordan is an independent contractor rather than an employee?

A)Ryan sets the work schedule.
B)Ryan provides the tools used.
C)Jordan follows a specific set of instructions from Ryan to complete tasks.
D)Jordan is paid based on tasks performed.
E)None of these.

Question 67

A qualified trade or business includes any trade or business including providing services as an employee.

Question 68

A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons:

A)To claim unreimbursed work-related expenses as a deduction for AGI.
B)To avoid the self-employment tax.
C)To avoid the overall limitation (50%) on unreimbursed business entertainment expenses.
D)To avoid the limitations on unreimbursed work-related expenses.
E)None of these.

Question 69

Aiden performs services for Lucas.Which of the following factors indicates that Aiden is an employee rather than an independent contractor?

A)Aiden provides his own support services (e.g., work assistants).
B)Aiden obtained his training (i.e., job skills) from his father.
C)Aiden is paid based on hours worked.
D)Aiden makes his services available to others.
E)None of these.

Question 70

There are three limitations on the qualified business income deduction: an overall limitation (based on modified taxable income), another that applies to high income taxpayers, and a third that applies to certain types of services businesses.

Question 71

Qualified business income (QBI) is defined as the ordinary income less ordinary deductions a taxpayer earns from a qualified trade or business (e.g., from a sole proprietorship, S corporation, or partnership) conducted in the United States by the taxpayer.

Question 72

If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.

Question 73

Employees who render an adequate accounting to employers and are fully reimbursed will shift the 50% overall limitation on meal expenses to their employer.

Question 74

A worker may prefer to be treated as an independent contractor (rather than an employee) for which of the following reasons:

A)Avoids the overall limitation (50%) as to business meals.
B)All of the self-employment tax is deductible for income tax purposes.
C)Work-related expenses of an independent contractor are deductible for AGI.
D)A Schedule C does not have to be filed.
E)None of these.

Question 75

Only self-employed individuals are required to make estimated tax payments.

Question 76

In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least three out of five years) ensures treatment as a business.

Question 77

A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby- related expenses.

Question 78

Which of the following factors, if any, is not a characteristic of independent contractor status?

A)Work-related expenses are reported on Schedule A (Form 1040).
B)Receipt of a Form 1099 reporting payments received.
C)Workplace fringe benefits are not available.
D)Services are performed for more than one party.
E)None of these is correct.

Question 79

Qualified business income includes the reasonable compensation paid to the taxpayer by a qualified trade or business and guaranteed payments made to a partner for services rendered.

Question 80

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