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Chapter 9 Deductions: Employee And Self-Employed related Expenses
Research Problems
Research Problem 1. Aaron, a resident of Minnesota, has been a driver for Green
Delivery Service for the past six years. For this purpose, he leases a truck from
Green, and his compensation is based on a percentage of the income resulting from his pickup and delivery services. Green allows its drivers to choose their 10-hour shifts and does not exercise any control on how these services are carried out (e.g., the route to be taken or the order in which parcels are delivered or picked up).
Under Green’s operating agreement with its drivers, Green can terminate the arrangement after 30 days’ notice. In practice, however, Green allows its truckers to quit immediately without giving advance notice. The agreement also labels the drivers as independent contractors. Green maintains no health or retirement plans for its drivers, and each year it reports their income by issuing Forms 1099–MISC (and not Forms W–2). Green requires its drivers to maintain a commercial driver’s license and be in good standing with the state highway law enforcement division.
Citing the employment tax Regulations in §§ 31.3121(d)–1(c)(2) and 31.3306(i)–1(b), an IRS agent contends that Aaron is an independent contractor and, therefore, is subject to the self-employment tax. Based on Peno Trucking, Inc. (93 TCM 1027,
T.C.Memo. 2007–66), Aaron disagrees and contends that he is an employee (i.e., not self-employed). Who is correct? Why?
Research Problem 2. Your client, a large construction firm organized as a C corporation, allows certain employees (including the president of the corporation) to use its company-owned airplane for nonbusiness flights. The employees include the value of those flights in their income. Your client is uncertain about how to treat the expenses related to these nonbusiness flights. In certain situations, the expenses of operating the plane are more than the income imputed to the employees, and in certain circumstances, the expenses are less. In doing some of their own research, your client found Sutherland Lumber-Southwest, Inc. [114 T.C. 197 (2000)], which suggests that as long as the employee imputes income, the full amount of the related expenses can be deducted. [The decision in the case was affirmed on appeal, Sutherland Lumber-
Southwest, Inc. v. Comm. (2001–2 USTC {50,503, 88 AFTR 2d 2001–5026, 255
F.3d 495 (CA–8, 2001)).] Should your client follow the approach in Sutherland?
Research Problem 3. What are the guidelines regarding the deductibility of luxury water travel (e.g., cruise ship) for business purposes? Refer to Chapter 1 of IRS Publication
463.
Roger CPA Review Questions
1. The following facts pertain to Lewis Productions, a sole proprietorship owned by
Lewis, in the current year:
Total cost of holiday gifts given to top 10 clients (each gift identical) $ 550
Receivable for prior-year purchase from Egan, who declared bankruptcy in the current year 2,500
Lodging costs incurred by Lewis while traveling to client sites 3,000
Meal costs incurred by Lewis only while traveling to and from client sites 1,500
Meal costs incurred by Lewis while entertaining business clients and engaging in some business-related discussion 3,000
Considering only the above facts, what is the total amount of business expenses that
Lewis can declare on Schedule C of the current year’s tax return?
a. $8,000
b. $5,500
c. $6,250
d. $8,750
2. Pinnacle Productions, Inc., holds a luxury skybox season ticket at a local sporting arena. Pinnacle uses the skybox to entertain clients while holding business
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity meetings. The cost of Pinnacle’s luxury skybox season ticket is $25,000; the cost of the most expensive non-luxury season ticket is $15,000. How much of the luxury skybox season ticket cost may Pinnacle deduct from its corporate taxable income?
a. $7,500
b. $20,000
c. $10,000
d. $15,000
3. Betty, a salesperson, is an employee with $52,000 AGI who maintains a home office for the convenience of her employer, Smart Systems. The office takes up 5% of
Betty’s home and is used exclusively for her job. Smart Systems reimburses all of
Betty’s direct costs of maintaining the home office. Betty also has the following expenses associated with her home:
Expense Amount
Real property taxes on residence $3,500
Interest expense on residence 5,000
Operating expenses on residence 1,800
Depreciation on residence (based on 5% home office use) 150
Considering these facts, how much may Betty deduct from AGI on her tax return, assuming she elects to itemize deductions?
a. $0
b. $665
c. $9,410
d. $10,450
4. In 2016 Archer, a single individual, moved from Minneapolis to Phoenix to start a new job with InnoTech, which began February 1, 2016. Archer worked for Inno-
Tech until November 15, 2016, when Archer accepted a job offer from InnoTech’s
Phoenix rival MegaTech. The following 2016 facts apply to Archer:
Income $75,000
Expenses incurred during
Minneapolis–Phoenix move 1,000 Moving truck rental
1,000 Packing and unloading costs paid to moving company
1,500 Loss on sale of Minneapolis home
750 Lodging
250 Meals
100 Storage costs in Phoenix prior to move-in to new home
Considering only the above facts, what is Archer’s 2016 adjusted gross income?
a. $70,475
b. $70,650
c. $72,150
d. $75,000
5. On February 15 of the current year, Young received a $10,000 lump-sum payment from a qualified profit sharing plan, the full amount of which Young rolled over into an IRA 46 days later. How much of this lump-sum payment may Young exclude from current year gross income?
a. $0
b. $10,000
c. Depends on contribution limit
d. $8,000
6. Claire is a self-employed individual who owns and runs Claire’s Creations LLC.
In 2016, she had $225,000 in net self-employment earnings, including a deduction for 50% of self-employment tax, prior to any Keogh deduction. Claire has a defined contribution, stock bonus Keogh plan. What is the highest deductible Keogh contribution
Claire can make for the 2016 tax year? Assume no excess contribution carryover from prior years.
a. $56,250
b. $225,000
c. $52,000
d. $45,000