Question 1

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.

Accepted Answer

The gifts given by Teal Corporation, a turkey and a bottle of wine, during the December holiday season are considered de minimis fringe benefits, which are typically excluded from the employee's gross income and not subject to the 50% limitation that applies to meals and entertainment expenses.

Question 2

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).

Accepted Answer

The qualified business income deduction was specifically designed to provide a tax break to noncorporate businesses. This includes sole proprietors, partnerships, and S corporations. The deduction allows these businesses to subtract up to 20% of their qualified business income from their taxable income, reducing their overall tax liability.

Question 3

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.

Accepted Answer

The answer of If property taxes and home mortgage interest...

Question 4

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

Accepted Answer

Code § 199A allows an individual to deduct up to 20% of their qualified business income from a sole proprietorship, partnership, or S corporation, not 25%.

Question 5

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.

Accepted Answer

The three-out-of-five year presumption test allows the taxpayer to presume an activity is a business (and not a hobby) if it is profitable in three out of the last five consecutive years, but it does not permit deducting expenses in excess of gross income from the activity. Deductions can only offset the income generated, not exceed it.

Question 6

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

Accepted Answer

The payment structure is a significant indicator of the nature of the working relationship. Being paid based on tasks performed rather than receiving a regular wage suggests a level of autonomy consistent with an independent contractor status. Independent contractors typically agree to complete specific tasks for a set fee, whereas employees are often paid hourly or earn a salary for their ongoing work, regardless of specific tasks.

Question 7

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

Accepted Answer

A qualified trade or business under the IRS guidelines specifically excludes the trade or business of performing services as an employee.

Question 8

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

Accepted Answer

Independent contractors are generally responsible for paying self-employment tax, which is a combination of Social Security and Medicare taxes. Employees, on the other hand, only pay half of these taxes as they are typically paid by the employer. Therefore, a worker may prefer to be classified as an employee to avoid paying these additional taxes. The other choices are not directly related to the employee vs. independent contractor classification.

Question 9

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

Accepted Answer

Payment based on hours worked is a characteristic of an employee-employer relationship, as opposed to an independent contractor who is typically paid for the completion of a project or service. The other factors listed (providing support services, obtaining training, making services available to others) do not definitively indicate whether Aiden is an employee or independent contractor.

Question 10

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.

Accepted Answer

This statement is correct. There are three limitations on the qualified business income deduction. The first limitation is based on modified taxable income, the second applies to high income taxpayers, and the third applies to certain types of services businesses.

Question 11

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.

Accepted Answer

Qualified business income is indeed defined as the ordinary income less ordinary deductions earned from a qualified trade or business conducted in the US by the taxpayer.

Question 12

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

Accepted Answer

According to the IRS Publication 225, if an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.

Question 13

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

Accepted Answer

When employees provide a proper accounting to their employer and are fully reimbursed, the 50% limitation on meal expenses is shifted to their employer. This means that the employer can deduct the full amount of the meal expense instead of being limited to only 50%.

Question 14

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

Accepted Answer

Choice C is correct because work-related expenses of an independent contractor are deductible for AGI, which can provide tax savings. Choices A, B, and D are incorrect because they do not explain why a worker may prefer to be treated as an independent contractor. Choice E is incorrect because there is at least one valid reason for a worker to prefer to be treated as an independent contractor.

Question 15

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

Accepted Answer

Both self-employed individuals and people who receive income from sources that are not subject to withholding (such as investment income) may be required to make estimated tax payments.

Question 16

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.

Accepted Answer

The answer of In determining whether an activity should be...

Question 17

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

Accepted Answer

This is because the IRS considers hobby income to be non-business income and therefore does not allow deductions for hobby-related expenses. Hobby income is reported on Form 1040, Line 21 as "other income."

Question 18

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

Accepted Answer

Reporting work-related expenses on Schedule A (Form 1040) is not a characteristic of independent contractor status. Independent contractors typically report their work-related expenses on Schedule C (Form 1040) as part of their self-employment income.

Question 19

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.

Accepted Answer

Qualified business income (QBI) does not include reasonable compensation paid to the taxpayer by an S corporation, or guaranteed payments made to a partner for services rendered to the partnership. These payments are considered wages or compensation for services and are not included in QBI.

Question 20

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

Accepted Answer

Even though a taxpayer who claims the standard deduction cannot deduct certain expenses like mortgage interest or charitable contributions, they may still be eligible to claim an office in the home deduction if they use a portion of their home regularly and exclusively for business purposes.

Quiz 11: Individuals As Employees and Proprietors