Solutions for Questions and Problems Chapter 4

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CHAPTER 4 SELF-EMPLOYED AND EMPLOYEE EXPENSES

Group 1 - Multiple Choice Questions 1. 2. 3. 4. 5. 6. D C E C D B (Section 4.1) (Section 4.1) (Section 4.1) (Section 4.2) (Section 4.2) (Section 4.2) 7. 8. 9. 10. 11. 12. C C D E C E (Section 4.4) (Section 4.2) (Section 4.3) (Section 4.7) (Section 4.4) (Section 4.4) 13. 14. 15. 16. 17. 18. D A E B C E (Section 4.5) (Section 4.6) (Section 4.8) (Section 4.9) (Section 4.10) (Section 4.10)

Group 2 - Problems 1. 2. George will be able to deduct the expenses only if he itemizes deductions and only as miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation. (Section 4.1) Airfare to San Diego Hotel charges while on business Meals while on business ($210 x 50%) Car rental while on business Total travel expense deduction $ 575 340 105 120 $1,140 (Section 4.2)

3. 4.

Per diem rates are subject to change. It is necessary to go online to get current rates from IRS Publication 1542. (Section 4.2) a. Business miles: 95% x 22,650 miles. Before July 1, 10,759 miles x $.505 = $5,433 After June 30, 10,759 miles x $.585 = $6,294 21,518 miles $11,727 Actual automobile costs $8,300 Business percentage x 95% Business expenses $7,885 Since the standard mileage method yields the larger deduction, Teresa should use the standard mileage method to determine her deduction. If Teresa has not used the standard mileage method previously, she must use the actual cost method this year, even though it yields a lower deduction. (Section 4.3)

b.

c.

5. 6. 7.

See Form 2106 on pages 77 and 78. (Section 4.3) $7,500 (15,000 miles/20,000 miles x $10,000 = $7,500) (Section 4.3) a. Gross income from the business Less interest and taxes Balance to depreciation and utilities Total home office expenses allowed: Interest and taxes $2,400 825 $1,575 $ 825

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Chapter 4 Self-Employed and Employee Expenses

Utilities Depreciation (limited to $1,075) b. Total Gross income from the business Less interest and taxes Balance to depreciation and utilities Total home office expenses allowed: Interest and taxes Utilities Depreciation (limited to $1,275) Total (Section 4.4)

500 1,075 $2,400 (Section 4.4) $2,600 825 $1,775 $ 825 500 1,275 $2,600 $2,400 625 $3,025

8.

Rent ($9,600 x 300/1200) Utilities other than telephone ($2,500 x 300/1200) Total home office expenses (Section 4.4)

9. $1,600. The total costs of her apartment ($8,000, or $6,000 + $1,000 + $200 + $800) are multiplied by the 20% (200/1000 square feet) home office allocation to arrive at a $1,600 deduction for home office expenses. (Section 4.4) 10. $3,000. Grace may deduct 50% of $6,000 ($5,000 + $500 + $500). The Country Club dues are nondeductible. The deduction is claimed on Schedule C. (Section 4.5) 11. a. Business meals at the country club Business meals at various restaurants Total entertainment deduction before the 50% limitation Deductible Expense b. 12. a. b. c. $ 850 2,250 $3,100 x 50% $1,550

The dues to the clubs are not deductible. The tennis fees are a personal expense and are not deductible. (Section 4.5) No. Law school prepares him to enter a new profession. Yes. The course is designed to improve her skills in her current job and does not prepare her to enter a new profession. No. The educational expense is not paid to meet the requirements of law or regulation for keeping the taxpayers current job. The course would prepare her to enter a new profession. (Section 4.6) In some cases, these taxpayers may qualify for the deduction for higher education expenses (not a miscellaneous deduction) discussed in Section 5.9, or the lifetime learning credit discussed in Section 6.4.

13. Bob may deduct 100% of the course fees and travel and 50% of the meals, or $1,630. (Section 4.6) 14. Law book library, depreciation expense ($1,500/12 x 6 months) Legal journal subscription Legal reference service Total deduction (Section 4.7) $ 750 170 1,500 $2,420

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Problem 5

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Chapter 4 Self-Employed and Employee Expenses

Problem 5, continued

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15. Coopers uniforms $400 Laundry for Coopers uniforms 75 Alterations for Coopers uniforms 65 Brandys safety glasses and shoes 95 Total deduction $635 Even though Brandys work clothes are required by her employer, the cost of her work clothes and her laundry costs for the work clothes are not deductible since the clothes are suitable for general wear. (Section 4.8) 16. Josh may deduct the full $750. His judicial robes meet the requirement that they be a condition of employment and not suitable for everyday use. The deduction will be taken as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor since Josh is an employee. (Section 4.8, 4.1) 17. Donee Ms. Sears Mr. Williams Mr. and Mrs. Sample Calendars Mr. Shiver Total business gift deduction (Section 4.9) See pages 81 and 82. (Section 4.10) See the answer to Problem 18. (Section 4.10) The business auto expense is $2,180 (2,000 miles x 50.5 cents + 2,000 miles x 58.5 cents). The expense should be deducted on Marthas Schedule C. (Section 4.3, 4.10) $50,000 $ 1,000 $ $ $ $ $ 1,573 1,822 2,000 175 2,000 Amount Allowed $ 29 0 25 300 175 $529

18. 19. 20.

21. Gross income Expenses: Travel Transportation 3,115 miles x 50.5 cents 3,115 miles x 58.5 cents Entertainment in total $4,000 x 50% 7 gifts at $50 each, limited to $25 Rent and utilities allocated to home office 20% x $10,000 Total Expenses Taxable Business Income

$ 8,570 $41,430 (Section 4.10, etc.)