Deck 23: Business Expenses and Deferred Compensation

Question 1

The key distinguishing factor for classifying a worker as either an employee or self-employed includes the right to control and direct the worker with respect to both the end result and the means to accomplish that end result.

Answer 1

True

Question 2

Unreimbursed employee business expenses are deductions for AGI.

Answer 2

False

Question 3

An individual taxpayer incurs expenses connected with her work as an independent contractor and her rental real estate activities.Assuming all the expenses are ordinary,necessary and reasonable,they will be deductible

A)as deductions for AGI for the business expenses and as itemized deductions for the rental property expenses.
B)as deductions for AGI for the rental property expenses and as itemized deductions for the business expenses.
C)as deductions for AGI for both the business expenses and the rental property expenses.
D)as itemized deductions for both the business expenses and the rental property expenses.

Answer 3

C

Question 4

If a self-employed individual is not "away from home," expenses related to local transportation are never deductible.

Question 5

Gwen,an independent consultant,traveled to New York City on a business trip.Gwen spent 4 days in business meetings and conferences and then spent 2 days sightseeing in the area.Gwen's plane fare for the trip was $250.Meals cost $160 per day.Hotels and other incidental expenses amounted to $250 per day.Gwen may deduct

A)$1,570.
B)$1,487.
C)$1,890.
D)$0.

Question 6

An employee travels out of town on company business.She is fully reimbursed from her employer under an accountable plan.The employee can exclude the reimbursement from income.

Question 7

Tessa,a self-employed architect,has planned a five-day vacation trip to Miami with her husband.Before leaving,one of Tessa's clients asks her to visit a potential building site while in Miami.Tessa spends one morning evaluating the site and bills the client for the time.Tessa can now deduct the cost of the airfare for the trip.

Question 8

Entertainment expense (i.e.,the hockey tickets)is not deductible.If food and beverages are consumed before,during,or after an entertainment event,the cost of the meals must be separately paid for or separated from the cost of the entertainment.In this case,the food and beverages are not separately stated from the entertainment cost.An employee travels out of town as required by his job,and he is not reimbursed.The employee can deduct these work-related travel costs.

Question 9

Charishma,a CPA,paid the following expenses in pursuing her profession: -Professional society dues -$450
-Tax and accounting journals -$250
How much of these expenses can be deducted if she is an employee of an accounting firm,and how much is deductible is she is a self-employed CPA? Ignore any potential limitations based on AGI.

A)Employee -$0; Self-employed -$0
B)Employee -$700; Self-employed -$700
C)Employee -$0; Self-employed -$700
D)Employee -$700; Self-employed -$0

Question 10

According to the IRS,a person's tax home is the location of the family residence regardless of the location of the taxpayer's principal place of work.

Question 11

Travel expenses related to foreign conventions are disallowed unless the meeting is directly related to the taxpayer's business,and it is reasonable for the meeting to be held outside of North America.

Question 12

Self-employed individuals are allowed to deduct ordinary,necessary and reasonable expenses incurred in operating the trade or business.These allowable deductions are included in itemized deductions.

Question 13

In determining whether a taxpayer is considered to be in travel status for tax purposes,a general rule is that if a person is reassigned for an indefinite period,the individual's tax home shifts to the new location and the taxpayer is not considered to be in travel status.

Question 14

In which of the following situations is the individual more likely to be classified as an independent contractor rather than an employee?

A)a nurse who is directly supervised by doctors in an office
B)a computer programmer who is instructed as to what projects to undertake,programming language and format,and hours of work
C)a nurse who travels to several different patients; she sets her own hours and is responsible for the delivery of nursing care and end result
D)a teacher whose hours,classroom responsibilities,content and methods of instruction are established by the school

Question 15

A three-day investment conference is held in Las Vegas.Dr.Singh,a dentist,travels from Ohio to improve his taxable investment portfolio performance.Ms.Gondin,a financial planner,travels from Seattle to attend the same conference to improve her skills in managing her clients' investment portfolios.The same standards of deductibility will apply to both attendees.

Question 16

Which of the following statements regarding independent contractors and employees is true?

A)Independent contractors pay Social Security and Medicare tax of 15.3%.
B)Employees must pay unemployment taxes.
C)Independent contractors and employees pay the same Social Security and Medicare tax rates.
D)Independent contractors deduct their business expenses "from AGI."

Question 17

A self-employed taxpayer is considered to be in travel status for temporary work assignments of two years or less.

Question 18

All of the following individuals are allowed a deduction except

A)Cora owns her own CPA firm and travels from Lafayette,LA,to Washington,DC,to attend a tax conference.
B)Jennifer,who lives in Houston,is the owner or several apartment buildings in Salt Lake City and travels there to inspect and manage her investments.
C)Alan is self-employed and is away from home overnight on job-related business.
D)Alison is an employee who is required to travel to company facilities throughout the United States in the conduct of her management responsibilities.She is not reimbursed by her employer.

Question 19

Jason,who lives in New Jersey,owns several apartment buildings in Baltimore.His travel expenses to Baltimore to inspect his property are tax deductible.

Question 20

If an individual is self-employed,business-related expenses are deductions for AGI.

Question 21

Taxpayers may use the standard mileage rate method when five vehicles are used simultaneously for business.

Question 22

Carol,a self-employed CPA,purchases hockey tickets online for $180 and takes a client to the game.Immediately before the game,Carol and the client dine on chicken wings and other food and beverages at the restaurant in the arena,and Carol charges the full $120 bill for dinner on her credit card.During dinner,and at various points throughout the game,they discuss an ongoing project Carlos is working on for the client and a potential new project.Carol will deduct

A)$150.
B)$120.
C)$60.
D)$300.

Question 23

Costs associated with commuting to and from a business location is a deductible expense.

Question 24

David acquired an automobile for $30,000 for use in his unincorporated business at the beginning of 2019 and used the standard mileage rate method in 2019.He plans to switch to the actual expense method for 2020.The automobile was used 25,000 miles for business purposes in 2019.What is the amount of the adjusted basis of the automobile for purposes of computing depreciation in 2020?

A)$30,000
B)$16,625
C)$23,500
D)$23,750

Question 25

Clarissa is a very successful self-employed real estate attorney.She spends $5,000 per year taking her clients out to dinner upon completion of a sale.Unfortunately,Clarissa is not a good recordkeeper and does not maintain receipts.However,such meals are standard practice in her field,and trade journals indicate that $5,000 is a reasonable amount for a successful high-end attorney.Clarissa will be allowed to deduct $2,500.

Question 26

Chelsea,who is self-employed,drove her automobile a total of 20,000 business miles in 2019.This represents about 75% of the auto's use.She has receipts as follows: $$\begin{array} {| l | r |} \hline \text { Parking (business only) } & \$ 500 \\\hline \text { Tolls (business only) } & 200 \\\hline \text { Repairs } & \$ 1,000 \\\hline\end{array}$$ Chelsea uses the standard mileage rate method.She can deduct

A)$12,300.
B)$13,150.
C)$11,600.
D)$12,125.

Question 27

Joe is a self-employed tax attorney who frequently entertains his clients at his country club.Joe's club expenses include the following: $$\begin{array} { | l | r | } \hline \text { Annual dues } & \$ 5,400 \\\hline \text { Golfing fees with clients } & 1,200 \\\hline \text { Charges for personal meals with his family } & 3,100 \\\hline \text { Meal charges related to hosting meetings with clients } & 4,000 \\\hline\end{array}$$ Assuming proper documentation is maintained,Joe may deduct

A)$2,000.
B)$2,600.
C)$5,300.
D)$4,000.

Question 28

Norman,a self-employed lawyer,traveled to San Francisco for four days on vacation,and while there spent another two days conducting business.Norman's plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cost $150 per day that was used for all six days.Norman may deduct

A)$1,050.
B)$0.
C)$1,217.
D)$1,200.

Question 29

A self-employed consultant takes a client to a major league football game to propose a new consulting engagement.Assuming appropriate documentation is maintained,the individual will receive a deduction for AGI for 50% of the ticket cost.

Question 30

Lokesh,a self-employed taxpayer,recently returned from a business conference out of town.Unfortunately,due to a malware attack on his system,he has lost his hotel and meal receipts.Due to the lack of receipts,Lokesh will not be able to deduct his hotel and meals.

Question 31

Gayle,a doctor with significant investments in the stock market,traveled on a cruise ship to Bermuda.Investment specialists provided daily seminars which Gayle attended.The cost of the cruise for four days is $2,500.Gayle can deduct (before application of any floors)

A)$0.
B)$1,250.
C)$2,000.
D)$2,500.

Question 32

A self-employed consultant takes a client to dinner to propose a new consulting engagement.Assuming appropriate documentation is maintained,the individual will receive a deduction for AGI for 50% of the meal cost.

Question 33

Rui,the sole proprietor of a CPA firm,is responsible for a large client base.She often drives to meetings at two different clients' offices in a single day.Rui can deduct the transportation costs of driving to the various client meetings.

Question 34

If the standard mileage rate is used in the first year,the actual expense method may not be used in future years.

Question 35

Carlos,a self-employed CPA,entertains a client in a luxury box at the hockey game.Immediately before the game starts,while dining on chicken wings and other food and beverages,and at various points throughout the evening,they discuss an ongoing project Carlos is working on for the client and a potential new project.Carlos is billed a fixed $300 for the box for the evening,which includes the refreshments and the game tickets.Carlos estimates the cost of the refreshments at $100.Carlos will deduct

A)$300.
B)$150.
C)$50.
D)$0.

Question 36

Generally,50% of the cost of business gifts is deductible up to $25 per donee per year for self-employed individuals.

Question 37

Richard,a self-employed business consultant,traveled from New Orleans to New York for both business and vacation.He spent 4 days conducting business and some days vacationing.He incurred the following expenses:
Airfare $460
Lodging-per day 175
Meals-per day 100
Business Entertainment 800
What is his deduction under the following two circumstances?
a.He spends three days on vacation,in addition to the business days.
b.He spends six days on vacation,in addition to the business days.

Question 38

Vincent,a self-employed taxpayer,travels to a business conference out of town.While at the conference,he spends $500 on breakfasts and dinners.Because he eats alone,he cannot deduct any of the meal costs.

Question 39

Rajiv,a self-employed consultant,drove his auto 20,000 miles this year,15,000 to meetings with clients and 5,000 for commuting and personal use.The cost of operating the auto for the year was as follows: $$\begin{array} { | l | r | } \hline \text { Gasoline and repairs } & \$ 7,000 \\\hline \text { Insurance } & 1,000 \\\hline \text { Depreciation } & 4,000 \\\hline\end{array}$$ Rajiv's AGI is $100,000 before considering the auto costs.Rajiv has used the actual cost method in the past.What is Rajiv's deduction for the use of the auto?

A)$0
B)$9,000
C)$12,000
D)$7,000

Question 40

Shane,a self-employed junior partner in a law firm,makes the following gifts with their values noted: $$\begin{array} { | l | r | } \hline \text { Managing partner in Shane's firm } & \$ 30 \\\hline \text { Shane's personal assistant } & 40 \\\hline 4 \text { clients } ( \$ 27 \text { each) } & 108 \\\hline\end{array}$$ What amount of the gifts is deductible?

A)$125
B)$150
C)$75
D)$178

Question 41

A sole proprietor will not be allowed to deduct current home office expenses to the extent that they create or increase a loss from her business.

Question 42

In-home office expenses which are not deductible in the year in which the costs were incurred due to income limitations may be carried forward to subsequent years.

Question 43

Educational expenses incurred by a self-employed bookkeeper for courses necessary to sit for the CPA exam are fully deductible.

Question 44

A company maintains a qualified pension plan for all of its employees.The company can also establish a qualified profit-sharing plan for its management team.

Question 45

Alex is a self-employed dentist who operates a qualifying office in his home.Alex has $180,000 gross income from his practice and $160,000 of expenses directly related to the business,i.e.,non-home office expenses.Alex's allocable home office expenses for mortgage interest expenses and property taxes are $14,000 and other home office expenses are $9,000.What is Alex's total allowable home office deduction?

A)$9,000
B)$14,000
C)$20,000
D)$23,000

Question 46

In-home office expenses are deductible if the office is used exclusively on a regular basis as the principal place of business for any trade or business of the taxpayer.

Question 47

Charles is a self-employed CPA who maintains a qualifying office in his home.Charles has $110,000 gross income from his practice and incurs $88,000 in salaries,supplies,computer services,etc.Charles's mortgage interest and real estate taxes allocable to the office total $10,000.Other expenses total $14,000 and consist of depreciation,utilities,insurance,and maintenance.What is Charles' total home office expense deduction?

A)$10,000
B)$14,000
C)$22,000
D)$24,000

Question 48

In-home office expenses for an office used by the taxpayer for administrative or management activities of the taxpayer's trade or business are never deductible.

Question 49

A qualified pension plan requires that employer-provided benefits must be 100 percent vested after five years of service.

Question 50

Nonqualified deferred compensation plans can discriminate in favor of highly compensated executives.

Question 51

Under a qualified pension plan,the employer's deduction is usually deferred until the employee recognizes income.

Question 52

Fin is a self-employed tutor,regularly meeting with clients in a 100 square foot area of his home.Fin is terrible at keeping records.Without the records,he will be able to deduct $500 for a home office deduction for AGI.

Question 53

Camellia,an accountant,accepts a new job located 1,000 miles away from her current job location.She has to pay a moving company plus the transportation costs for herself to move to the new location.The new employer does not pay moving costs.Camellia will be allowed a deduction for the work-related move.

Question 54

Louisa,an active duty U.S.Air Force pilot,receives orders to transfer from the Fort Benning (Georgia)base to the Fort Hood (Texas)base.It is a permanent transfer.John is a civilian employee of the U.S.Navy.He is transferred by the Navy from Norfolk (Virginia)to San Diego (California).Both individuals pay their own moving expenses.Regarding their ability to deduct the moving expenses

A)John will be allowed a deduction,but Louisa cannot deduct her moving expenses.
B)Louisa will be allowed a deduction,but John cannot deduct his moving expenses.
C)both Louisa and John will be allowed a moving expense deduction.
D)neither Louisa,nor John,will be allowed a moving expense deduction.

Question 55

Educational expenses incurred by a self-employed CPA for courses necessary to meet continuing education requirements are fully deductible.

Question 56

The following individuals maintained offices in their home: (1)Dr.Austin is a self-employed surgeon who performs surgery at four hospitals.He uses his home for administrative duties as he does not have an office in any of the hospitals.
(2)June,who is a self-employed plumber,earns her living in her customers' homes.She maintains an office at home where she bills clients and does other paperwork related to her plumbing business.
(3)Cassie is an employed as a sales representative of Montgomery Products,an out-of-town company which does not have a local office.She uses an extra room in her home to plan her sales calls,write up orders and store inventory.The use of this room in her home is a required part of the job.,and this work is the only use of this room.
Who is entitled to a home office deduction?

A)Dr Austin
B)Dr.Austin and June
C)Cassie and June
D)All of the taxpayers are entitled to a deduction.

Question 57

An employer contributing to a qualified retirement plan will be allowed a deduction when the employee recognizes the income at retirement or separation from service.

Question 58

In a defined contribution pension plan,fixed amounts are contributed based upon a specific formula and retirement benefits are based on the value of a participant's account at the time of retirement.

Question 59

There are several different types of qualified retirement plans.One common criteria across qualified retirement plans is that employers deduct the contributions and employees include the contributions in taxable income in the same period.

Question 60

All of the following may deduct education expenses except

A)Richard is a self-employed dentist who incurs expenses to attend a convention on new techniques in oral surgery.
B)Paige is an self-employed accountant who incurs expenses to take advanced tax courses.
C)Hope is an independent business consultant who incurs expenses to pursue an MBA degree.
D)Marvin is a high school teacher who incurs expenses for education courses to meet new course requirements to maintain his job.

Question 61

Ross works for Houston Corporation,which has a contributory defined contribution pension plan.The employer's monthly contribution to the plan is 8 percent of each participating employee's monthly salary,while the employee contributes only 6 percent.Which of the following statements best describes the benefits of the plan?

A)Houston receives a deduction for its contributions to the plan when Ross receives a distribution from the plan.
B)While Ross is taxed on the employer's contributions to the plan,his own contributions are not taxed until he receives a distribution from the plan.
C)Ross may deduct his own contributions to the pension plan,and Ross reports income from the plan each year until he receives distributions from the plan.
D)The amounts contributed to the plan and the earnings on those contributions are not taxed to Ross until he retires or receives a distribution from the plan.

Question 62

Martin Corporation granted an incentive stock option to employee Caroline on January 1,2013.The option price was $150,and the FMV of the Martin stock was also $150 on the grant date.The option allowed Caroline to purchase 160 shares of Martin stock.Caroline exercised the option on August 1,2017,when the stock's FMV was $250.Unless otherwise stated,assume Caroline is a qualifying employee.If Caroline sells the stock on September 5,2019,for $350 per share,she must recognize (ignore alternative minimum tax)

A)0)No gain or loss is recognized at exercise or sale with incentive stock options.
B)long-term capital gain of $16,000 in 2019.
C)ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2019.
D)long-term capital gain of $32,000 in 2019.

Question 63

The maximum tax deductible contribution to a Roth IRA in 2019 is $6,000 ($7,000 for a taxpayer age 50 or over).

Question 64

Tobey receives 1,000 shares of YouDog! stock as part of his compensation package.Tobey's employment contract with YouDog!,Inc.,states that if he leaves before completion of three years of employment,he will forfeit the stock.The stock currently has a fair market value of $12 per share.Which of the following statements regarding Tobey's choices is not true?

A)Tobey does not have to recognize any income from receiving the stock until his rights to the stock are fully vested.
B)Tobey must report $12,000 as income due to the receipt of the stock in the current year.
C)Tobey may elect to report the $12,000 FMV of the stock as ordinary income in the current year.
D)If Tobey elects to report $12,000 as income in the current year and the stock price falls to $5 per share when his rights to the stock are vested,Tobey is not allowed to deduct a loss.

Question 65

Mirasol Corporation granted an incentive stock option to employee Josephine two years ago.The option price was $150 and the FMV of the Mirasol stock was also $150 on the grant date.The option allowed Josephine to purchase 160 shares of Mirasol stock.Josephine exercised the option this year when the stock's FMV was $250.Unless otherwise stated,assume Josephine is a qualifying employee.The results of the above transactions to Mirasol Corporation will be

A)no compensation deduction.
B)a compensation deduction of $16,000 on the grant date.
C)an alternative minimum tax adjustment item of $16,000 on the exercise date.
D)a compensation deduction of $16,000 on the exercise date.

Question 66

Characteristics of profit-sharing plans include all of the following with the exception of

A)a predetermined formula is used to allocate employer contributions to individual employees and to establish benefit payments.
B)forfeitures of benefits under the plan may be reallocated to the remaining participants.
C)the company must make contributions to the plan if it has profits during the year.
D)annual employer contributions are not required,but substantial,recurring contributions must be made to satisfy the requirement that the plan be permanent.

Question 67

The maximum tax deductible contribution to a traditional IRA in 2019 is $6,000 ($7,000 for a taxpayer age 50 or over).

Question 68

Employees receiving nonqualified stock options recognize ordinary income at the grant date or exercise date if there is a readily ascertainable fair market value.

Question 69

Which of the following statements is incorrect regarding unfunded deferred compensation plans?

A)The employee is not taxed on the compensation amount when it is deposited in an escrow account.
B)An accrual-basis employer can deduct the compensation amount when it is accrued in the year of service.
C)An employee is taxed when the amount is actually paid or made available.
D)A 20% excise tax will apply if the employee can voluntarily elect to receive payment early.

Question 70

Assuming AGI below the threshold,a contributor may make a deductible contribution to a Coverdell Education Savings Account for a qualified designated beneficiary of up to $2,000.

Question 71

All of the following characteristics are true of an incentive stock option with the exception of

A)the option price must be equal to or greater than the stock's FMV on the option's grant date.
B)the employee cannot own more than ten percent of the voting power of the employer corporation's stock immediately prior to the option's grant date.
C)the option must be granted within ten years from the date the plan is adopted and the employee must exercise the stock option within ten years from the grant date.
D)there is no limit to the value of the options that become exercisable to an employee in a single year.

Question 72

Wilson Corporation granted an incentive stock option to Reva on January 1,two years ago.The option price was $300,and the FMV of the Wilson stock was also $300 on the grant date.The option allowed Reva to purchase 150 shares of Wilson stock.Reva exercised the option on August 1,this year,when the stock's FMV was $400.Unless otherwise stated,assume Reva is a qualifying employee.The results of the above transactions to Reva will be

A)no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000.
B)no income tax or alternative minimum tax effect for Reva.
C)ordinary income to Reva on the exercise date of $15,000.
D)capital gain to Reva on the exercise date of $15,000.

Question 73

Which of the following statements is correct regarding limitations on employer's contributions to qualified retirement plans in 2019?

A)Defined benefit plans are limited to an annual benefit to an employee of the lesser of $56,000 or 100% of the employee's average compensation for the highest three years.
B)Defined contribution plan contributions are limited to the lesser of $225,000 or 25% of an employee's compensation.
C)Defined contribution plan contributions are limited to the lesser of $56,000 or 100% of an employee's compensation.
D)If an employer has more than one type of qualified plan,a maximum deduction of 100% of compensation is allowed.

Question 74

A sole proprietor establishes a Keogh plan.The highest effective percentage of earned income she can contribute is 25 percent.

Question 75

SIMPLE retirement plans allow a higher level of employer contributions than do SEP IRAs.

Question 76

Corporations issuing incentive stock options receive a tax deduction for compensation expense.

Question 77

In a contributory defined contribution pension plan,all of the following are true with the exception of

A)a separate account is established for each participant.
B)both the employee and employer can make contributions to the plan.
C)amounts are contributed to the plan based upon a specific formula.
D)retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years.

Question 78

Hunter retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year.During his years of employment,Hunter contributed $130,000 to the plan on a pre-tax basis.Based on IRS tables,his life expectancy is 260 months.All of the contributions were on a pre-tax basis.This year,Hunter will include what amount in income?

A)$0
B)$6,000
C)$24,000
D)$30,000

Question 79

Sam retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year.During his years of employment,Sam contributed $130,000 to the plan on an after-tax basis.Based on IRS tables,his life expectancy is 260 months.This year,Sam will include what amount in income?

A)0
B)$6,000
C)$24,000
D)$30,000

Question 80

All taxpayers are allowed to contribute funds to Health Savings Accounts to supplement their health insurance.