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Chapter 9 Deductions: Employee And Self-Employed related Expenses
56. LO.3, 6, 9 During the year, Brenda has the following expenses related to her employment:
Airfare $8,500
Meals 4,000
Lodging 4,900
Transportation while in travel status (taxis and limos) 940
Entertainment of clients 8,000
Although Brenda renders an adequate accounting to her employer, she is reimbursed for only $12,000 of the above expenses. What are Brenda’s tax consequences based on the following assumptions?
a. The $12,000 reimbursement does not designate which expenses are covered.
b. The reimbursement specifically covers only the meals and entertainment expenses.
c. The reimbursement covers any of the expenses other than meals and entertainment.
d. If Brenda has a choice of reimbursement procedures [parts (a), (b), or (c) above], which should she select? Why?
57. LO.6, 9, 10 Audry, age 38 and single, earns a salary of $59,000. She has interest income of $1,600 and has a $2,000 long-term capital loss from the sale of a stock investment. Audry incurs the following employment-related expenses during the year:
Transportation $5,500
Meals 2,800
Lodging 4,200
Entertainment of clients 2,200
Professional dues and subscriptions 300
Under an accountable plan, Audry receives reimbursements of $4,500 from her employer. Calculate her AGI and itemized employee business expenses.
58. LO.3, 6, 9, 10, 11 Ava recently graduated from college and is interviewing for a position in marketing. Gull Corporation has offered her a job as a sales representative that will require extensive travel and entertainment but provide valuable experience. Under the offer, she has two options: a salary of $53,000 and she absorbs all expenses; a salary of $39,000 and Gull reimburses for all expenses.
Gull assures Ava that the $14,000 difference in the two options will be adequate to cover the expenses incurred. What issues should have an impact on Ava’s choice?
59. LO.5, 7, 10 B. J. and Carolyn Grace are full-time employees. B. J. is an elementary school teacher, and Carolyn is a registered nurse at a hospital. During the year, they incur the following employment-related expenses:
School supplies for use in the classroom $1,400
Emergency room uniforms 800
Union dues (teachers association) 200
Job hunting expenses (Carolyn obtained another nursing position but decided not to change jobs) 1,300
Continuing education correspondence courses (required to maintain nursing license) 380
Professional dues and subscriptions 1,100
None of these expenses are reimbursed by the employers.
For the year, the Graces file a joint return reflecting salary income of $90,000.
They also have gambling income of $6,000 and gambling losses of $7,000 (fully substantiated).
They pay $400 to have their tax return prepared. They have other itemized deductions (i.e., interest on home mortgage, property taxes on personal residence, state income taxes, and charitable contributions) of $14,500. Determine the total amount of itemized deductions allowed to the Graces.
60. LO.1, 2, 4, 5, 7, 10 Complete the following table by classifiying each of the independent expenditures (assume that no reimbursement takes place).
Expense Item
Deductible for AGI
Deductible from AGI
Not
Deductible
a. Moving expense of an employee ______ ______ ______
b. Tax return preparation fee incurred by an employed plumber ______ ______ ______
c. Safety glasses purchased by an employed pipefitter ______ ______ ______
d. Dues to auto club (e.g., AAA) for taxpayer who uses the automatic mileage method ______ ______ ______
e. Nursing refresher course for taxpayer who retired from nursing five years ago ______ ______ ______
f. Gambling loss not in excess of gambling gain by a self-employed architect ______ ______ ______
g. Contribution to Roth IRA by a self-employed attorney ______ ______ ______
h. Business travel expenses by a statutory employee ______ ______ ______
i. Job hunting expense by an elementary school teacher seeking a position as an elementary school principal ______ ______ ______
j. Cost of bar exam review course taken by a recent law school graduate ______ ______ ______
Cumulative Problems
61. David R. and Ella M. Cole (ages 39 and 38, respectively) are husband and wife who live at 1820 Elk Avenue, Denver, CO 80202. David is a regional sales manager for
Wren Industries, a national wholesaler of plumbing and heating supplies, and Ella is a part-time dental hygienist for a chain of dental clinics.
• David is classified by Wren as a statutory employee with compensation for 2015 (based on commissions) of $95,000. He is expected to maintain his own office and pay for all business expenses from this amount. Wren does not require him to render any accounting as to the use of these funds. It does not withhold Federal and state income taxes but does withhold and account for the payroll taxes incurred (e.g., Social Security and Medicare). The Coles are adequately covered by Wren’s noncontributory medical plan but have chosen not to participate in its § 401(k) retirement plan.
David’s employment-related expenses for 2015 are summarized below:
Airfare $8,800
Lodging 5,000
Meals (during travel status) 4,800
Entertainment 3,600
Ground transportation (e.g., limos, rental cars, and taxis) 800
Business gifts 900
Office supplies (includes postage, overnight delivery, and copying) 1,500
Tax Return Problem
The entertainment involved business meals for purchasing agents, store owners, and building contractors. The business gifts consisted of $50 gift certificates to a national restaurant. These were sent by David during the Christmas holidays to 18 of his major customers.
In addition, David drove his 2013 Ford Expedition 11,000 miles for business and 3,000 for personal use during 2015. He purchased the Expedition on August
15, 2012, and has always used the automatic (standard) mileage method for tax purposes. Parking and tolls relating to business use total $340 in 2015.
• When the Coles purchased their present residence in April 2012, they devoted 450 of the 3,000 square feet of living space to an office for David. The property cost $440,000 ($40,000 of which is attributable to the land) and has since appreciated in value. Expenses relating to the residence in 2015 (except for mortgage interest and property taxes; see below) are as follows:
Insurance $2,600
Repairs and maintenance 900
Utilities 4,700
Painting office area; area rugs and plants (in the office) 1,800
In terms of depreciation, the Coles use the MACRS percentage tables applicable to 39-year nonresidential real property. As to depreciable property (e.g., office furniture), David tries to avoid capitalization and uses whatever method provides the fastest write-off for tax purposes.
• Ella works part-time as a substitute for whichever hygienist is ill or on vacation or when one of the clinics is particularly busy (e.g., prior to the beginning of the school year). Besides her transportation, she must provide and maintain her own uniforms. Her expenses for 2015 appear below.
Uniforms $690
State and city occupational licenses 380
Professional journals and membership dues in the American
Dental Hygiene Association 340
Correspondence study course (taken online) dealing with teeth whitening procedures 420
Ella’s salary for the year is $42,000, and her Form W–2 for the year shows income tax withholdings of $4,000 (Federal) and $1,000 (state) and the proper amount of
Social Security and Medicare taxes. Because Ella is a part-time employee, she is not included in her employer’s medical or retirement plans.
• Besides the items already mentioned, the Coles had the following receipts during
2015.
Interest income—
State of Colorado general purpose bonds $2,500
IBM bonds 800
Wells Fargo Bank CD 1,200 $ 4,500
Federal income tax refund for year 2014 510
Life insurance proceeds paid by Eagle Assurance
Corporation 200,000
Inheritance of savings account from Sarah Cole 50,000
Sales proceeds from two ATVs 9,000
For several years, the Coles’s household has included David’s divorced mother,
Sarah, who has been claimed as their dependent. In late November 2015, Sarah unexpectedly died of coronary arrest in her sleep. Unknown to Ella and David,
Sarah had a life insurance policy and a savings account (with David as the designated beneficiary of each). In 2014, the Coles purchased two ATVs for $14,000.
After several near mishaps, they decided that the sport was too dangerous. In
2015, they sold the ATVs to their neighbor.
• Additional expenditures for 2015 include:
Funeral expenses for Sarah $ 4,500
Taxes—
Real property taxes on personal residence $6,400
Colorado state income tax due (paid in April 2015 for tax year 2014) 310 6,710
Mortgage interest on personal residence 6,600
Paid church pledge 2,400
Contributions to traditional IRAs for Ella and David ($5,500 t $5,500) 11,000
In 2015, the Coles made quarterly estimated tax payments of $1,400 (Federal) and $500 (state) for a total of $5,600 (Federal) and $2,000 (state).
Part 1—Tax Computation
Using the appropriate forms and schedules, compute the Coles’s Federal income tax for 2015. Disregard the alternative minimum tax (AMT) and various education credits as these items are not discussed until later in the text (Chapters 12 and 15).
Relevant Social Security numbers are:
David Cole 123-45-6788
Ella Cole 123-45-6787
Sarah Cole 123-45-6799
The Coles do not want to contribute to the Presidential Election Campaign Fund.
Also, they want any overpayment of tax refunded to them and not applied toward next year’s tax liability. Suggested software: H&R BLOCK Tax Software.
Part 2—Follow-Up Advice
Ella has always wanted to pursue a career in nursing. To this end, she has earned a substantial number of college credits on a part-time basis. With Sarah no longer requiring home care, Ella believes that she can now complete her degree by attending college on a full-time basis.
David would like to know how Ella’s plans will affect their income tax position.
Specifically, he wants to know:
• How much Federal income tax they will save if Ella quits her job.
• Any tax benefits that might be available from the cost of the education.
Write a letter to David addressing these concerns. Note: In making your projections, assume that David’s salary and expenses remain the same. Also disregard any consideration of the various educational tax credits as these are not discussed until Chapter 12.
62. Addison Parker, single and age 32, lives at 3218 Columbia Drive, Spokane, WA
99210. She is employed as regional sales manager by VITA Corporation, a manufacturer and distributor of vitamins and food supplements. Addison is paid an annual salary of $83,000 and a separate travel allowance of $24,000. As to the travel allowance,
VITA does not require any accounting on the part of Addison.
• Addison participates in VITA’s contributory health and § 401(k) plans. During
2016, she paid $3,500 for her share of the medical insurance and contributed $11,000 to the § 401(k) retirement plan.
Tax Computation Problem
• Addison uses her automobile 70% for business and 30% for personal. The automobile, a Toyota Avalon, was purchased new on June 30, 2014, for $37,000 (no trade-in was involved). Depreciation has been claimed under MACRS 200% declining balance method, and no § 179 election was made in the year of purchase. (For depreciation information, see the IRS Instructions for Form 4562, Part
V). During 2016, Addison drove 15,000 miles and incurred and paid the following expenses relating to the automobile:
Gasoline $3,100
Insurance 2,900
Auto club dues 240
Interest on car loan 1,100
Repairs and maintenance 1,200
Parking (during business use) 600
Traffic fines (during business use) 500
• Because VITA does not have an office in Spokane, the company expects Addison to maintain one in her home. Out of 1,500 square feet of living space in her apartment,
Addison has set aside 300 square feet as an office. Expenses for 2016 relating to the office are listed below.
Rent $18,000
Utilities 4,000
Insurance (renter’s casualty and theft coverage) 1,600
Carpet replacement (office area only) 1,200
• Addison’s employment-related expenses (except for the trip to Korea) for 2016 are summarized below.
Airfare $4,100
Lodging 3,200
Meals 2,800
Entertainment (business lunches) 2,400
Transportation (taxis and airport limos) 300
Business gifts 540
Continuing education 400
Professional journals 140
Most of Addison’s business trips involve visits to retail outlets in her region.
Store managers and their key employees, as well as some suppliers, were the parties entertained. The business gifts were boxes of candy costing $30 ($25 each plus $5 for wrapping and shipping) sent to 18 store managers at Christmas. The continuing education was a noncredit course dealing with improving management skills that Addison took online.
• In July 2016, Addison traveled to Korea to investigate a new process that is being developed to convert fish parts to a solid consumable tablet form. She spent one week checking out the process and then took a one-week vacation tour of the country. The round-trip airfare was $3,600, while her expenses relating to business were $2,100 for lodging ($300 each night), $1,470 for meals, and $350 for transportation. Upon returning to the United States, Addison sent her findings about the process to her employer. VITA was so pleased with her report that it gave her an employee achievement award of $10,000. The award was sent to
Addison in January 2017.
• Addison provides more than 50% of the support of her parents (Gordon and Anita
Parker), who live in Seattle. In addition to modest Social Security benefits, her parents receive a small amount of interest on municipal bonds and nontaxable retirement income.
• Besides the items already mentioned, Addison had the following receipts in 2016:
Interest income—
City of Tacoma general purpose bonds $ 350
Olympia State Bank 400 $ 750
Proceeds from property sales—
City lot $13,000
Sailboat 18,000 31,000
Cash found at airport 5,000
Regarding the city lot (located in Vancouver), Addison purchased the property in
2001 for $16,000 and held it as an investment. Unfortunately, the neighborhood where the lot was located deteriorated, and property values declined. In 2016,
Addison decided to cut her losses and sold the property for $13,000. The sailboat was used for pleasure and was purchased in 2012 for $16,500. Addison sold the boat because she purchased a new and larger model (see below). While at the
Spokane airport, Addison found an unmarked envelope containing $5,000 in $50 bills. As no mention of any lost funds was noted in the media, Addison kept the money.
• Addison’s expenditures for 2016 (not previously noted) are summarized below.
Medical (not covered by insurance) $7,000
State and local general sales tax 3,300
Church pledge (2015 and 2016) 5,600
Fee paid for preparation of 2015 income tax return 500
Contribution to mayor’s reelection campaign fund 200
Premiums on life insurance policy 2,100
Contribution to a Coverdell Education Savings account (on behalf of a favorite nephew) 2,000
Most of the medical expenses Addison paid were for her mother’s dental implants. Addison keeps careful records regarding sales taxes. In 2016, the sales tax total was unusually high due to the purchase of a new sailboat. In 2016, Addison decided to pay her church pledge for both 2015 and 2016. The insurance premium was on a policy covering her father’s life. (Addison is the designated beneficiary under the policy.)
Relevant Social Security numbers are 123-45-6785 (Addison), 123-45-6783 (Gordon), and 123-45-6784 (Anita). Addison’s employer withheld $5,600 for Federal income tax purposes, and she applied her $800 overpayment for 2015 toward the 2016 tax liability.
Compute Addison’s Federal income tax payable (or refund) for 2016. In making the calculation, use the Tax Rate Schedule and disregard the application of the alternative minimum tax (AMT), which is not discussed until Chapter 15.