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Chapter 9 Deductions: Employee And Self-Employed related Expenses
Problems
29. LO.2, 3 During the year, Olivia holds two jobs. After an eight-hour day at the first job, she works three hours at the second job. On Fridays of each week, she returns home for dinner before going to the second job. On the other days (Monday through Thursday), she goes directly from the first job to the second job, stopping along the way for a meal. The mileage involved is as follows:
Home to first job 15
First job to second job 18
Home to second job 20
a. Assuming that Olivia works 48 weeks during the year, how much of her mileage is deductible?
b. Can Olivia deduct the dinners she purchased? Why or why not?
30. LO.2, 5 William is employed by an accounting firm and uses his automobile in connection with his work. During the month of October 2016, he works at the office for 3 days and participates in the audit of a key client for 19 days. In the audit situation, William goes directly from his home to the client’s office. On all other days, he drives to his employer’s office. On four Saturdays in October, he drives from his home to a local university where he attends classes in a part-time MBA program.
Relevant mileage is as follows:
Home to office 12
Office to audit client 13
Home to audit client 14
Home to university 10
Using the automatic mileage method, what is William’s deduction for the month?
31. LO.2 Ella is the regional sales manager for a fast-food chain. She starts her work day by driving from home to the regional office, works there for several hours, and then visits the three sales outlets in her region. Relevant mileage is as follows:
Home to regional office 10
Regional office to sales outlet 1 13
Sales outlet 1 to sales outlet 2 11
Sales outlet 2 to sales outlet 3 9
Sales outlet 3 to home 15
If Ella uses the automatic mileage method and works 240 days in 2016, what is her deduction for the year?
32. LO.2 Jackson uses his automobile 90% for business and during 2016 drove a total of
14,000 business miles. Information regarding his car expenses is listed below.
Business parking $ 140
Auto insurance 1,300
Auto club dues (includes towing service) 180
Toll road charges (business-related) 200
Oil changes and engine tune-ups 210
Repairs 160
Depreciation allowable 2,850
Fines for traffic violations (incurred during business use) 320
Gasoline purchases 2,800
What is Jackson’s deduction in 2016 for the use of his car if he uses:
a. The actual cost method?
b. The automatic mileage method?
c. What records must Jackson maintain?
33. LO.2 On July 1, 2012, Rex purchases a new automobile for $40,000. He uses the car 80% for business and drives the car as follows: 8,000 miles in 2012, 19,000 miles in 2013, 20,000 miles in 2014, and 15,000 miles in 2015. Determine Rex’s basis in the auto as of January 1, 2016, under the following assumptions.
a. Rex uses the automatic mileage method.
b. Rex uses the actual cost method. [Assume that no § 179 expensing is claimed and that 200% declining-balance cost recovery with the half-year convention is used—see Chapter 8. The recovery limitation for an auto placed in service in
2012 is as follows: $3,160 (first year), $5,100 (second year), $3,050 (third year), and $1,875 (fourth year).]
34. LO.3 Kristen, the regional manager for a national hardware chain, is based in
Atlanta. During March and April of this year, she has to replace temporarily the district manager in Jackson, Mississippi. During this period, Kristen flies to Jackson on Sunday night, spends the week at the district office, and returns home to
Atlanta on Friday afternoon. The cost of returning home is $550, while the cost of spending the weekend in Jackson would have been $490.
a. Presuming no reimbursement by her employer, how much, if any, of these weekend expenses may Kristen deduct?
b. Would your answer in part (a) change if the amounts involved are reversed (i.e., the trip home cost $490; staying in Jackson would have been $550)? Explain.
35. LO.3, 6 In June of this year, Dr. and Mrs. Bret Spencer traveled to Denver to attend a three-day conference sponsored by the American Society of Implant Dentistry.
Bret, a practicing oral surgeon, participated in scheduled technical sessions dealing with the latest developments in surgical procedures. On two days, Mrs.
Spencer attended group meetings where various aspects of family tax planning were discussed. On the other day, she went sightseeing. Mrs. Spencer does not work for her husband, but she does their tax returns and handles the family investments.
Expenses incurred in connection with the conference are summarized below.
Airfare (two tickets) $2,000
Lodging (single and double occupancy are the same rate—$250 each day) 750
Meals ($200 _ 3 days)* 600
Conference registration fee (includes $120 for Family
Tax Planning sessions) 620
Car rental 300 * Split equally between Dr. and Mrs. Spencer.
How much, if any, of these expenses can the Spencers deduct?
36. LO.1, 3, 6 Kim works for a clothing manufacturer as a dress designer. She travels to
New York City to attend five days of fashion shows and then spends three days sight seeing. Her expenses are as follows:
Airfare $1,500
Lodging (8 nights) 1,920
Meals (8 days) 1,440
Airport transportation 120
Assume that lodging/meals are the same amount for the business and personal portion of the trip ($240 per day for lodging and $180 per day for meals).
a. Presuming no reimbursement, how much can Kim deduct as to the trip?
b. Would the tax treatment of Kim’s deduction differ if she was an independent contractor (rather than an employee)? Explain.
37. LO.3 On Thursday, Justin flies from Baltimore (his home office) to Cadiz (Spain).
He conducts business on Friday and Tuesday; vacations on Saturday, Sunday, and Monday (a legal holiday in Spain); and returns to Baltimore on Thursday. Justin was scheduled to return home on Wednesday, but all flights were canceled due to bad weather. Therefore, he spent Wednesday watching floor shows at a local casino.
a. For tax purposes, what portion of Justin’s trip is regarded as being for business?
b. Suppose Monday was not a legal holiday. Would this change your answer in part (a)? Explain.
c. Under either part (a) or (b), how much of Justin’s airfare qualifies as a deductible business expense?
38. LO.3 Monica travels from her office in Boston to Lisbon, Portugal, on business. Her absence of 13 days was spent as follows:
Thursday Depart for and arrive at Lisbon
Friday Business transacted
Saturday and Sunday Vacationing
Monday through Friday Business transacted
Saturday and Sunday Vacationing
Monday Business transacted
Tuesday Depart Lisbon and return to office in Boston
a. For tax purposes, how many days has Monica spent on business?
b. What difference does it make?
c. Could Monica have spent more time than she did vacationing on the trip without loss of existing tax benefits? Explain.
39. LO.4 Caden, a financial planner, decides to quit his job with an investment bank in
Charleston, South Carolina, and establish a private practice in Santa Fe, New
Mexico. In connection with the move in 2016, he incurs the following expenses:
Moving van charge $4,500
Lodging during move 540
Meals during move 410
Loss on sale of residence in Charleston 9,000
Mileage for personal autos 3,500 miles
How much of these expenses, if any, can Caden deduct?
40. LO.4, 7 Upon losing his job as a plant manager in Quincy, Massachusetts, Anthony incurs $6,200 in job search expenses. Having no success in finding new employment in the same type of work, Anthony moves to Clearwater, Florida, in
2016 and begins a charter boat business. His expenses in connection with the move are summarized below.
Penalty for breaking lease on Quincy rented residence $2,800
Forfeiture of membership in Quincy Country Club 2,200
Packing and moving van charges 7,100
Lodging during move (3 nights) 380
Meals during move 360
Mileage (for two automobiles) 2,400 miles
How much of these expenses may Anthony deduct?
41. LO.4 After being downsized by his former employer, in November 2015, Wayne moves from Minnesota to Alabama to accept a new job. When filing his Federal income tax return for 2015, Wayne deducts the $14,000 in moving expenses he incurred (none of which were reimbursed by either his former or new employer).
On June 6, 2016, Wayne’s employment terminates. What are the tax consequences if the termination occurred because:
a. Wayne was killed by a drunk driver?
b. Wayne was downsized by the new employer?
c. Wayne was fired by the new employer because he assaulted a client?
d. Wayne quit because he inherited a large amount of money and decided he did not want to work anymore?
42. LO.5 Elijah is employed as a full-time high school teacher. The school district where he works recently instituted a policy requiring all of its teachers to start working on a master’s degree. Pursuant to this new rule, Elijah spent most of the summer of
2016 taking graduate courses at an out-of-town university. His expenses are as follows:
Tuition $6,600
Books and course materials 1,500
Lodging 1,700
Meals 2,200
Laundry and dry cleaning 200
Campus parking 300
In addition, Elijah drove his personal automobile 2,200 miles in connection with the education. He uses the automatic mileage method.
a. How much, if any, of these expenses might qualify as deductions for AGI?
b. How much, if any, of these expenses might qualify as deductions from AGI?
43. LO.5 In each of the following independent situations, determine how much, if any, qualifies as a deduction for AGI under § 222 (qualified tuition and related expenses):
a. Lily is single and is employed as an architect. During 2016, she spends $4,100 in tuition to attend law school at night. Her MAGI is $64,000.
b. Liam is single and is employed as a pharmacist. During 2016, he spends $2,400 ($2,100 for tuition and $300 for books) to take a course in herbal supplements at a local university. His MAGI is $81,000.
c. Hailey is married and is employed as a bookkeeper. She spends $5,200 for tuition and $900 for books and supplies pursuing a bachelor’s degree in accounting.
Her MAGI is $40,000 on the separate return she files.
d. John spends $6,500 of his savings on tuition to attend Carmine State College.
John is claimed as a dependent by his parents.
e. How much, if any, of the above amounts not allowed under § 222 might otherwise qualify as a deduction from AGI?
44. LO.6, 9 Eric is a licensed commercial pilot who works for Snipe Charter Jet Service.
Typically, Eric, who lives near the airport, flies a charter out of Tupelo, Mississippi, to either Las Vegas or Reno, spends several nights there, and then returns home with the same group. Snipe provides Eric with a travel allowance of $1,800 per month but requires no accountability. For the current calendar year, Eric had the following job-related expenses:
Meals $ 7,000
Lodging 10,000
Transportation (taxis, limos) 500
Uniforms 1,300
Dry cleaning of uniforms 400
Annual physical exam 1,500
The uniforms are required to be worn on the job. The Federal Aviation Administration requires the annual physical exam for the maintenance of a commercial pilot’s license. How may Eric treat these expenses for Federal income tax purposes?
45. LO.6 Stork Associates paid $60,000 for a 20-seat skybox at Veterans Stadium for eight professional football games. Regular seats to these games range from $80 to $250 each. At one game, an employee of Stork entertained 18 clients. Stork furnished food and beverages for the event at a cost of $1,300. The game was preceded by a bona fide business discussion, and all expenses are adequately substantiated.
a. How much may Stork deduct for this event?
b. What if there was no bona fide business discussion either before or after the event?
46. LO.6 During the current year, Paul, the vice president of a bank, made gifts in the following amounts:
To Sarah (Paul’s personal assistant) at Christmas $36
To Darryl (a key client)—$3 was for gift wrapping 53
To Darryl’s wife (a homemaker) on her birthday 20
To Veronica (Paul’s boss) at Christmas 30
In addition, on professional assistants’ day, Paul takes Sarah to lunch at a cost of $82. Presuming that Paul has adequate substantiation and is not reimbursed, how much can he deduct?
47. LO.7 Melanie is employed full-time as an accountant for a national hardware chain.
She recently started a private consulting practice, which provides tax advice and financial planning to the general public. For this purpose, she maintains an office in her home. Expenses relating to her home for 2016 are as follows:
Real property taxes $3,600
Interest on home mortgage 3,800
Operating expenses of home 900
Melanie’s residence cost $350,000 (excluding land) and has living space of 2,000 square feet, of which 20% (400 square feet) is devoted to business. The office was placed in service in February 2015, and under the regular method, Melanie had an unused office in the home deduction of $800 for 2015. Presuming sufficient net income from her consulting practice, what is Melanie’s office in the home deduction under the:
a. Regular method.
b. Simplified method.
48. LO.7 Christine is a full-time teacher of the fourth grade at Vireo Academy. During the current year, she spends $1,400 for classroom supplies. On the submission of adequate substantiation, Vireo reimburses her for $500 of these expenses—the maximum reimbursement allowed for supplies under school policy. [The reimbursement is not shown as income (Box 1) of Form W–2 given to Christine by Vireo.] What are the income tax consequences of the $1,400 if Christine:
a. Itemizes her deductions from AGI?
b. Chooses the standard deduction?
49. LO.8 Amber’s employer, Lavender, Inc., has a § 401(k) plan that permits salary deferral elections by its employees. Amber’s salary is $99,000, her marginal tax rate is 25%, and she is 42 years old.
a. What is the maximum amount Amber can elect for salary deferral treatment for
2016?
b. If Amber elects salary deferral treatment for the amount in part (a), how much can she save in taxes?
c. What amount would you recommend that Amber elect for salary deferral treatment for 2016?
50. LO.8 Shyam is a participant in a SIMPLE § 401(k) plan. He elects to contribute 4% of his $40,000 compensation to the account, while his employer contributes 3%.
What amount will not vest immediately, if any?
51. LO.8 Harvey is a self-employed accountant with earned income from the business of $120,000 (after the deduction for one-half of his self-employment tax). He has a profit sharing plan (e.g., defined contribution Keogh plan). What is the maximum amount Harvey can contribute to his retirement plan in 2016?
52. LO.8 Answer the following independent questions with respect to traditional IRA contributions for 2016:
a. Juan, age 41, earns a salary of $28,000 and is not an active participant in any other qualified plan. His wife, Agnes, has no earned income. What is the maximum total deductible contribution to their IRAs? Juan wants to contribute as much as possible to his own IRA.
b. Abby, age 29, has earned income of $25,000, and her husband, Sam, has earned income of $2,600. They are not active participants in any other qualified plan.
What is the maximum contribution to their IRAs?
c. Leo’s employer makes a contribution of $3,500 to Leo’s simplified employee pension plan. If Leo is single, has earned income of $32,000, and has AGI of $29,000, what amount, if any, can he contribute to an IRA?
53. LO.8 Jimmy establishes a Roth IRA at age 47 and contributes a total of $89,600 over
18 years. The account is now worth $112,000. How much of these funds may
Jimmy withdraw tax-free?
54. LO.8 Carri and Dane, ages 34 and 32, respectively, have been married for 11 years, and both are active participants in employer qualified retirement plans. Their total AGI in 2016 is $187,000, and they earn salaries of $87,000 and $95,000, respectively.
What amount may Carri and Dane:
a. Contribute to regular IRAs?
b. Deduct for their contributions in part (a)?
c. Contribute to Roth IRAs?
d. Deduct for their contributions in part (c)?
55. LO.3, 6, 9 Charles has AGI of $94,000 during the year and the following expenses related to his employment:
Lodging while in travel status $5,000
Meals during travel 4,000
Business transportation 6,000
Entertainment of clients 3,800
Professional dues and subscriptions 800
Charles is reimbursed $14,000 under his employer’s accountable plan. What are his deductions for and from AGI?