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October 5, 2012 CONCEPTS IN FEDERAL TAXATION CHAPTER 6: BUSINESS EXPENSE & MIDTERM REVIEW.

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Presentation on theme: "October 5, 2012 CONCEPTS IN FEDERAL TAXATION CHAPTER 6: BUSINESS EXPENSE & MIDTERM REVIEW."— Presentation transcript:

1 October 5, 2012 CONCEPTS IN FEDERAL TAXATION CHAPTER 6: BUSINESS EXPENSE & MIDTERM REVIEW

2 ADMINISTRATIVE Extra problems

3 1. HW Problems Assignment #6 Chapter 6 P31, 36, 36, 39, 44, Midterm Review HOMEWORK PROBLEMS

4 You have just been hired as a tax accountant by a local public accounting firm. One partner is impressed by your writing skills and asks you to write a one-page memo to a client describing the general rules on the deductibility of meals and entertainment. The client also needs to know under what circumstances the cost of its skybox (with 10 tickets) at Optus Park is deductible. #31

5 General rules for meals and entertainment expenses to qualify as deductible business expenses: 1.Business purposeto make a profit 2.Ordinary, necessary, and reasonable in amount 3.Directly related to or associated with the active conduct of the taxpayers business activity 4.Adequately documented #31

6 Directly related test: 1.General expectation of deriving income or a business benefit from the meals or entertainment 2.A bona fide business activity takes place during the meal or entertainment 3.The principal reason for providing the meal or entertainment is to conduct business 4.The expenses are related to the taxpayer and people involved in the business Associated with test: 1.Clear business purpose 2.Meal or entertainment must directly precede or follow substantial business discussions #31

7 Skybox: No portion of the skybox fee is deductible Client can deduct the cost of the ten tickets Deduction for each ticket is limited to the price of the most expensive non-luxury box seat Only 50% of meal and entertainment expenses are deductible (youre eating the food too!) #31

8 Prudy is a recent college graduate who has taken a position with a real estate brokerage firm. Initially, Prudy will be selling both residential and commercial property. She is thinking about buying a new car at a cost of $14,500. However, the salesperson is trying to sell her a car that costs $18,000. He has assured her that because she is now self-employed, the entire cost of the car is tax-deductible. Prudy comes to you, her tax accountant, for advice about the purchase of the car. She tells you she expects that 65% of her driving will be for business purposes. She asks you to write her a letter specifying whether she can deduct the entire cost of the car, which expenses she needs to keep track of, and how these expenses are used in computing the business deduction for her car. #36

9 The information provided to Prudy by the car dealer is not correct! Because Prudy will be using her car for business and personal purposes, the cost of the car and any expenditures associated with it must be allocated between the business and personal use in a reasonable manner Only 65% of the cost of operating the automobile is deductible. The remaining 35% is a personal expense and is not deductible The automobile is treated as two separate assets for tax purposes #36

10 Prudy may elect to use either the actual cost method or the standard mileage rate method to determine the allowable deductions on the automobile Standard Mileage Rate Method: Deduct 55.5 cents per business mile driven Deduct direct out of pocket expenses that are unrelated to the operating costs of the car: Business portion of parking Business portion of tolls Business portion of interest (deductible only if tax payer is self employed) Business portion of property taxes May not be used by a business that operates more than 5 vehicles in the business at the same time #36

11 Actual Cost Method: Deduct direct out of pocket expenses that are unrelated to the operating costs of the car (same as Standard Method) Also deduct business portion of: Depreciation (Depreciation of automobiles is subject to special rules discussed in Chapter 10) Gas and oil Repairs Insurance License #36

12 Both methods require Prudy to substantiate the business miles driven (keep records) Because she is self-employed, she can deduct the business portion of any ad valorem property taxes and interest she pays on her car loan Remember, property taxes are referred to as ad valorem taxes because they are based on the value of the property being taxed (most property taxes are not based on the true fair market value of the property) #36

13 Olga has to travel to Philadelphia for 2 days on business. She enjoys history and is planning to visit the Liberty Bell and other historic sights in the city. If time permits, she would like to make a side-trip to nearby Gettysburg. A friend of Olgas tells her, The best part of traveling on business is that once the business is over, you can sightsee all you want and the cost is tax-deductible. Olga, who is self-employed, has scheduled her trip over the Labor Day weekend so that she can spend 3 days sightseeing. Write a letter to Olga in which you explain whether her friends advice is correct. #39

14 Olgas friend has provided her with poor advice! Only the business portion of a combined business and personal trip is deductible In determining whether the travel cost of a combined business and personal trip is deductible, the taxpayer must determine whether the primary purpose of the trip is business or pleasurethis is determined based on whether more days were spent on business than for pleasure: Because only 2 days are spent on business while 3 days are for pleasure, the primary purpose of the trip is considered pleasure (40% business < 60% personal) Olga will not able to deduct the cost of her travel to Philadelphia (nor Gettysburg) She may deduct her lodging, meals (limited to 50%) and the cost of incidental expenses (laundry, tips, etc.) for the two business days The costs of the remaining 3 days are considered nondeductible personal expenditures #39

15 Paula is single and works as a high school science teacher. Each summer, she travels to a national conference on high school science curriculum. She also spends one week during the summer traveling to areas in the United States to further her science knowledge. This year, she spent one week exploring the caves and rock formations around Carlsbad, New Mexico. She plans on using the knowledge and information from this trip in her earth science class. The costs of each trip are as follows: Science Conference Carlsbad Trip Airfare$350$450 Hotel Meals Incidentals Rental car Registration Tours - 90 Paula has asked for your advice on the deductibility of these costs as a business expense. Write her a letter explaining the allowable deduction for these costs. If any of the costs are not deductible, explain why she cannot deduct them. #44

16 Because Paula is a high school science teacher and attends the annual science conference to improve her skills as a science teacher, the cost of the conference qualifies as a deductible business expense The amount she can deduct as an unreimbursed business expense is: Airfare$ 350 Hotel 200 Meals ($120 x 50%) 60 Incidentals 40 Car rental 75 Conference registration 100 Total deduction$ 825 #44

17 Unreimbursed business expenses are treated as a miscellaneous itemized deduction, which is reduced by 2% of AGI The expense would not qualify as an education expense deductible for AGI because the expense was not paid to a qualified educational institution ($5,250 deduction for reimbursement from a qualified educational assistance plan) #44

18 None of the costs that Paula incurs on her trip to Carlsbad are deductible travel expenses Travel as a form of education is not deductible In this case, the travel is intended to improve Paulas job skills (a form of education) and is not deductible #44

19 For each of the following situations, state whether the expense related to the transaction can be deducted as an insurance expense: Types of insurance premiums that qualify for deduction include: Fire, theft, and other casualty insurance, and liability insurance Employees group medical and group term life insurance, and workers comp Employee performance and fidelity bonds to protect against losses caused by employees Business interruption and overhead insurance to reimburse the business for lost profits and overhead from casualty or other unexpected event #54

20 a. Baker Company pays the insurance premium to provide each of its employees with a $50,000 whole life insurance policy. Baker and the insurance company consider the employee the owner of the policy. As owner of the policy, the covered employee designates the beneficiary of the life insurance proceeds in the event of the employees death. Each employees policy costs $2,000 per year. The $2,000 premium paid for each employee is not a deductible insurance expense Only premiums on group-term life insurance qualify for deduction as life insurance expense Because Baker does not benefit directly or indirectly from the policy, the insurance premiums can be deducted (by Baker) as additional compensation paid to the employees (the employees must include the $2,000 in gross income) When the employee dies, the beneficiary of the policy excludes the insurance proceeds from gross income #54

21 b. Baker Company has a nondiscriminatory self-insured medical reimbursement plan for the benefit of its employees. Once a month, Baker transfers $1,000 in cash from its general bank account to a special medical reimbursement checking account. The transfer is based on the premium an insurance company would demand to provide the same benefits to the employees. The $1,000 per month deposited into the medical reimbursement checking account is not deductible as an insurance expense The company still controls the money while it is in the checking account and can withdraw it for general business use at any time The amount deposited represents an estimated expense that is not permitted as a tax deduction (reserve accountingneed to know who and what amount) The amount actually reimbursed to employees from the medical reimbursement account can be deducted as a medical insurance expense and excluded from the employees gross income #54

22 c. The employees of Baker Company receive large sums of cash in the mail. To protect against loss, Baker pays a $500 annual insurance premium for an employees fidelity bond. The $500 premium paid for the employees fidelity bond is deductible as an insurance expense The purpose of the fidelity bond is to protect Baker from losses due to an employees dishonesty #54

23 d. Baker Company is owned by Ross. Baker pays a $1,500 annual premium for a sickness and disability income continuation insurance policy on Ross. The purpose of the policy is to give Ross $3,500 per month if he is unable to work for Baker because he is sick or disabled. The $1,500 premium paid on the income continuation policy is not deductible as an insurance expense but as compensation expense (Baker directly benefits when the policy pays off on Rosss death) If Ross collects the $3,500 per month benefit because he becomes ill or disabled, the payments are excluded from his gross income The income is excluded because when the company made the payments, the premium amount was already included in Rosss income #54

24 MIDTERM REVIEW – FALL 2011 Q1

25 Loan Fee$3,200 Not deductible as an ordinary expense Illegal kickback Home expenses related to business 1/6 is used for business, so deduct 1/6 of these expenses: Utilities$ 6,400 x 1/6=$ 1,067 Interest$ 2,400 x 1/6= 400 Depreciation$ 2,900 x 1/6=483 Total$ 1,950 Mortgage Interest The interest expense related to personal use of the home is an itemized deduction: $2,400 x (5 ÷ 6) = $2,000 MIDTERM REVIEW – Q1

26 Sales$110,000 Cost of cars sold78,000 Gross profit$ 32,000 Interest expense on cars$ 4,200 Property tax on cars700 Gas, oil, repairs1,200 Loan fees-0- Depreciation on equipment1,800 Business use of home1,950(9,850) Net$ 22,150 MIDTERM REVIEW – Q1

27 Some may question whether Ray qualifies for a home office deduction… Since the home is his principal place of business, the office should qualify for deduction (exclusive use test) Ray should report $22,150 of adjusted gross income from his used car business MIDTERM REVIEW – Q1

28 MIDTERM REVIEW – Q2

29 Todd's gross income is $48,121.6: Salary$50,000 Less: Pension plan payment by Todd ($50,000 * 5%)(2,500) Flexible benefits plan payment(500) Group-term life coverage in excess of $50,000 (30 * $.72) 21.6 Free parking - $3,120 - (12 * $240) 240 Health club membership 860 Taxable income $48,121.6 MIDTERM REVIEW – Q2

30 Employer contribution Todd is not taxed on his employer's $2,500 contribution to his retirement plan Medical expenses, medical insurance, professional dues He is not taxed on the reimbursement of medical expenses from the flexible benefits plan. The provision of medical insurance and the payment of his dues to professional organizations are also excludable fringe benefits MIDTERM REVIEW – Q2

31 Stephanie and Matt are married with 2 dependent children. During 2011, they have total gross income of $140,000. Their allowable deductions for adjusted gross income total $6,000 and they have $6,000 of allowable itemized deductions. Compute Stephanie and Matt's 2011 taxable income and 2011 income tax liability. Show calculations. MIDTERM REVIEW – Q3

32 Stephanie and Matt have taxable income of $106,900. Their tax liability on $106,900 is $18,785 [$9, % * ($106,900 - $70,700)] Gross income$140,000 Deductions for AGI (6,000) AGI$134,000 Deductions from AGI (Standard deduction)(11,900) Personal exemptions (4 * $3,800) (15,200) Taxable income$106,900 MIDTERM REVIEW – Q2

33 a. Assume that in addition to the above information, Stephanie sold some land that she had held as an investment at a gain of $5,000. What is the effect of the gain on their taxable income and income tax liability? You do not need to recalculate, just explain the general effect of the sale of the land. Capital asset: Any asset other than inventory, receivables, and depreciable or real property used in a trade or business Investment asset (stocks, bonds, rental property held for investments, etc.) Assets used for personal use purposes (home, furniture, clothing, personal automobile, etc.) by individuals A sale or other disposition of capital assets results in a capital gain or loss Capital gains and losses receive special tax treatment MIDTERM REVIEW – Q3

34 Characterization of gain on sale The gain on the sale of the land is a capital gain. The capital gain is included in their gross income, increasing taxable income by $5,000 Tax rate The effect on their tax liability depends on whether the gain is short-term or long-term: Short-term: If the gain is short-term, the $5,000 will be taxed at their 25% marginal tax rate Long-term: If the gain is long-term, it will be taxed at the 15% long- term capital gains rate Their tax liability will increase by $1,250 ($5,000 * 25%) if the gain is short-term or by $750 ($5,000 * 15%) if it is long-term MIDTERM REVIEW – Q3

35 b. Assume the same facts as in part (a) and that Matt also sold some stock he purchased several years ago at a $12,000 loss. What is the effect of the gain on the land and the loss on the stock on their taxable income? Explain. Characterization The loss on the sale of the stock is a capital loss Tax effect To determine the tax effect of the loss, it must be netted against other capital gains. This results in a net capital loss of $7,000 ($5,000 gain - $12,000 loss) Capital losses are deductible, but are limited to $3,000 per year. Stephanie and Matt's taxable income will decrease by the $3,000 capital loss deduction. The remaining $4,000 of net capital loss is carried forward. The $3,000 capital loss deduction reduces their tax liability by $750 ($3,000 * 25%) MIDTERM REVIEW – Q3

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38 MIDTERM REVIEW – MC 1. The rules that limit self-dealing through the related party provisions is a result of the: a.Ability to Pay Concept b.Administrative Convenience Concept c.Arms-Length Transaction Concept d.Capital Recovery Concept e.Pay-as-You-Go Concept

39 Arms-length transaction: Transaction in which all parties have bargained in good faith for their individual benefit Transaction that are not at arms length are generally not given any tax effect or are not given the intended tax effect MIDTERM REVIEW – MC 1) Family 2) Entity

40 2. Susan purchased a lot for investment purposes. She paid $10,000 for the lot. Three years later she sold the lot to her daughter for $8,000. Susan cannot deduct the loss due to a.Ability to Pay Concept b.Administrative Convenience Concept c.Arms-Length Transaction Concept d.Capital Recovery Concept e.Pay-as-You-Go Concept MIDTERM REVIEW – MC

41 3. Withholding of taxes from the taxpayers wages and quarterly estimated tax payments are a result of the a.Ability to Pay Concept b.Administrative Convenience Concept c.Arms-Length Transaction Concept d.Capital Recovery Concept e.Pay-as-You-Go Concept MIDTERM REVIEW – MC Pay-as-you-go: Taxpayers must pay as they generate income Tax withholding and estimated tax payments (methods to insure)

42 4. The allowance of deductions in calculating taxable income and the use of a progressive tax rate structure are a direct application of the a.Ability to Pay Concept b.Administrative Convenience Concept c.Arms-Length Transaction Concept d.Capital Recovery Concept e.Pay-as-You-Go Concept Ability to pay: Tax should be based on an amount that a taxpayer can afford to pay Where do you see this concept: Deductions Exclusions Credits Progressive tax rates MIDTERM REVIEW – MC

43 5. Penelope purchased an annuity contract that cost $45,000. The contract will pay Penelope $600 per month for 10 years after she reaches the age of 62. During the current year, Penelope turns 62 and receives 4 payments under the contract. The amount Penelope may exclude from taxable income as a return of capital on this year's payments is: a.$ 692 b.$ 900 c.$1,500 d.$2,250 e.$2,400 MIDTERM REVIEW – MC

44 Annuity Rule MIDTERM REVIEW – MC Cost of contract $45,000 Number of payments10 months x 12 years/120 Exclusion per payment $375 Payments 4 Total exclusion $1,500

45 MIDTERM REVIEW – MC 5. Penelope purchased an annuity contract that cost $45,000. The contract will pay Penelope $600 per month for 10 years after she reaches the age of 62. During the current year, Penelope turns 62 and receives 4 payments under the contract. The amount Penelope may exclude from taxable income as a return of capital on this year's payments is: a.$ 692 b.$ 900 c.$1,500 d.$2,250 e.$2,400

46 6. Benjamin has the following capital gains and losses for the current year: Long-term capital loss$(13,000) Long-term capital gain6,000 Short-term capital loss(10,000) Short-term capital gain12,000 What is Benjamin's net capital gain or loss for the year? a.Net long-term capital loss of $7,000 b.Net short-term capital gain of $2,000 c.Net long-term capital loss of $5,000 d.Net short-term capital gain of $1,000 e.Net long-term capital loss of $3,000 MIDTERM REVIEW – MC

47 Long-term capital loss$(13,000) Long-term capital gain6,000 Short-term capital loss(10,000) Short-term capital gain12, Net long-term capital loss$(7,000) Net short-term capital gain2,000 Net long-term capital loss$(7,000) - Net short-term capital gain2,000 = Net long-term capital loss $(5,000) Only net if signs in Step 1 are different

48 MIDTERM REVIEW – MC 6. Benjamin has the following capital gains and losses for the current year: Long-term capital loss$(13,000) Long-term capital gain6,000 Short-term capital loss(10,000) Short-term capital gain12,000 What is Benjamin's net capital gain or loss for the year? a.Net long-term capital loss of $7,000 b.Net short-term capital gain of $2,000 c.Net long-term capital loss of $5,000 d.Net short-term capital gain of $1,000 e.Net long-term capital loss of $3,000

49 7. Nora receives a salary of $55,000 during the current year. She sells some land that she held as an investment at a loss of $15,000 and some stock at a gain of $10,000. Nora's adjusted gross income is: a.$50,000 b.$52,000 c.$55,000 d.$62,000 e.$65,000 MIDTERM REVIEW – MC

50 Salary$55,000 Land(15,000) Stock10,000 Capital gain$10,000 Capital loss(15,000) Net capital loss(5,000) Ordinary income Capital loss Capital gain Limit of $3,000 per year

51 MIDTERM REVIEW – MC 7. Nora receives a salary of $55,000 during the current year. She sells some land that she held as an investment at a loss of $15,000 and some stock at a gain of $10,000. Nora's adjusted gross income is: a.$50,000 b.$52,000 c.$55,000 d.$62,000 e.$65,000

52 8. Boris, a single individual, has two sales of stock during the current year. The first sale produces a short-term loss of $27,000 and the second sale results in a long-term gain of $57,000. Boris's taxable income without considering the gain is $125,000. Boris's stock transactions will increase his taxable income by: a.$ -0- b.$30,000 c.$34,000 d.$54,000 MIDTERM REVIEW – MC ST loss$(27,000) LT gain57,000 Net LT gain30,000 No limit on gains

53 9. Victor receives a $4,000 per year scholarship from Southern College. The college specifies that $2,500 is for tuition, books, supplies, and equipment for classes. The other $1,500 is for room and board. As part of the conditions of the scholarship, Victor must also work ten hours per week as a grader, for which he is paid $1,700 for the year. Of the total amount received, Victor will include in income: a.$1,500 b.$1,700 c.$2,500 d.$3,200 e.$5,700 MIDTERM REVIEW – MC

54 Scholarship$4,000 Tuition, books, supplies and equipment2,500 Room and board1,500 Grader1,700 Taxable income Exclude from taxable income Taxable income Exclude from taxable income Scholarships: Excluded to provide incentive for education 1.Must not require the performance of future services 2.Must be used for direct costs of education such as tuition, fees, books, and supplies

55 MIDTERM REVIEW – MC 9. Victor receives a $4,000 per year scholarship from Southern College. The college specifies that $2,500 is for tuition, books, supplies, and equipment for classes. The other $1,500 is for room and board. As part of the conditions of the scholarship, Victor must also work ten hours per week as a grader, for which he is paid $1,700 for the year. Of the total amount received, Victor will include in income: a.$1,500 b.$1,700 c.$2,500 d.$3,200 e.$5,700

56 10. Nancy teaches school in a Chinese university. She is a U.S. citizen and has been teaching in China for 5 years. In the current year she will earn $95,000. What are some of Nancy's options for reporting U.S. gross income? I. She may include the foreign earned income in her gross income, calculate her U.S. income tax, and take a tax credit for foreign taxes paid. II. She may exclude up to $95,100 in foreign earned income for the current year. III. She may exclude all of her income because it is earned outside of the U.S. a.Only I is correct b.Only II is correct c.Only III is correct d.I and II are correct e.II and III are correct MIDTERM REVIEW – MC

57 Claim a tax credit that is the lesser of 1. Foreign taxes paid 2. U.S. tax that would have been paid on the foreign income Exclude up to $95,100 of foreign earned income 1.Must be a resident of the foreign country, or 2.Must reside in the foreign country for 330 days Options for foreign earned income:

58 MIDTERM REVIEW – MC 10. Nancy teaches school in a Chinese university. She is a U.S. citizen and has been teaching in China for 5 years. In the current year she will earn $95,000. What are some of Nancy's options for reporting U.S. gross income? I. She may include the foreign earned income in her gross income, calculate her U.S. income tax, and take a tax credit for foreign taxes paid. II. She may exclude up to $95,100 in foreign earned income for the current year. III. She may exclude all of her income because it is earned outside of the U.S. a.Only I is correct b.Only II is correct c.Only III is correct d.I and II are correct e.II and III are correct

59 11. Fanny's employer has a qualified pension plan. The employer makes all payments into the plan; employees do not contribute to the plan. During the current year, the employer pays $4,000 into the plan on Fanny's behalf. The plan also earns $3,000 during the year on the balance in Fannys retirement account. Which of the following statements is true? I.Fanny is not taxed on the $4,000 in the current year. II.Fanny is not taxed on the $3,000 in the current year. a.Only statement I is correct b.Only statement II is correct c.Both statements are correct d.Neither statement is correct MIDTERM REVIEW – MC

60 Employer contribution$4,000 Pension account appreciation3,000 Exclude from taxable income Qualified pension plan: Payments made by employers to qualified pension plans 1.Are not included in income in the year of payment 2.Are included in income in the year of withdrawal Defer tax until withdrawal

61 MIDTERM REVIEW – MC 11. Fanny's employer has a qualified pension plan. The employer makes all payments into the plan; employees do not contribute to the plan. During the current year, the employer pays $4,000 into the plan on Fanny's behalf. The plan also earns $3,000 during the year on the balance in Fannys retirement account. Which of the following statements is true? I.Fanny is not taxed on the $4,000 in the current year. II.Fanny is not taxed on the $3,000 in the current year. a.Only statement I is correct b.Only statement II is correct c.Both statements are correct d.Neither statement is correct

62 12. Milton is experiencing cash flow problems during the current year. Rather than foreclose on the $120,000 mortgage loan on his principal residence, his bank agrees to reduce the debt to $90,000. Prior to the debt reduction, Milton's total assets were $400,000 and his total liabilities were $390,000. How much income must Milton recognize from the reduction of his bank loan? a b.$10,000 c.$20,000 d.$30,000 MIDTERM REVIEW – MC

63 Discharge of indebtedness Loan: An amount received as a loan is generally excluded from income under the realization concept because it must be returned Loan forgiveness: If a lender forgives all or a portion of the debt, realization occurs and the forgiven portion is income Insolvency: Discharge due to insolvency or bankruptcy is excluded from income (Q: is the lender solvent?) Qualified principal residence: Discharge of indebtedness on qualified principal residence is excluded MIDTERM REVIEW – MC

64 12. Milton is experiencing cash flow problems during the current year. Rather than foreclose on the $120,000 mortgage loan on his principal residence, his bank agrees to reduce the debt to $90,000. Prior to the debt reduction, Milton's total assets were $400,000 and his total liabilities were $390,000. How much income must Milton recognize from the reduction of his bank loan? a b.$10,000 c.$20,000 d.$30,000

65 13. Charlotte traveled to Annapolis to attend a three-day business conference. After her meetings concluded, she stays 2 additional days sightseeing. Charlotte's airfare is $400 and pays $110 per night for lodging, $60 a day for meals, and $20 a day for incidentals. How much of Charlotte's costs can be deducted as a business expense? a.$ b.$ 400 c.$ 880 d.$ 970 e.$1,200 MIDTERM REVIEW – MC

66 One-time expenseDay 1Day 2Day 3Day 4Day 5Total Airfare $400 Lodging Meals Incidentals Deductible Deductible 3 days deductible 50% of 3 days deductible ConferenceSightseeing

67 MIDTERM REVIEW – MC 13. Charlotte traveled to Annapolis to attend a three-day business conference. After her meetings concluded, she stays 2 additional days sightseeing. Charlotte's airfare is $400 and pays $110 per night for lodging, $60 a day for meals, and $20 a day for incidentals. How much of Charlotte's costs can be deducted as a business expense? a.$ b.$ 400 c.$ 880 d.$ 970 e.$1,200

68 MIDTERM REVIEW – MC 14. Mario paints landscape portraits, and he treats the activity as a hobby. During the current year, Mario incurred the following expenses while earning $2,500 from sales of paintings: Paints and supplies$2,200 Utilities expenses for his studio 1,000 Advertising 300 Insurance on his studio and equipment 700 Mario uses the standard deduction and never itemizes his deductions. How should Mario report all of the items related to his hobby on his tax return? a.Hobby losses are not allowed so he couldnt deduct anything whether or not he itemizes anyway b.Report a $400 loss as a deduction for AGI c.Include $2,500 in gross income and deduct $2,500 for AGI d.Include $2,500 in gross income and deduct nothing for AGI e.Include $2,500 in gross income and deduct $1,700 for studio expenses

69 15. Elise is a self-employed business consultant who operates her business out of an office in her home. The home office passes the qualifying tests for deducting office in the home expenses. For the current tax year, Elise earns $90,000 from her business activities. She incurs $82,000 in supplies, travel expenses, wage expense, etc. Elise's mortgage interest and real estate taxes allocable to the home office space were determined to be $9,000. Also, other expenses including insurance, repairs and maintenance, utilities, and depreciation allocable to the home office space total $11,000. How much of the other expenses (insurance, repairs, etc.) can Elise deduct? a.$ b.$ 2,000 c.$ 8,000 d.$ 9,000 e.$11,000 MIDTERM REVIEW – MC

70 Home office deduction cannot exceed income from home office minus deductions from all other business expenses Capped deductions can be carried forward to next year Income$90,000 Supplies, etc.(82,000) Mortgage interest & tax(9,000) Other expenses(11,000) $90,000 limit

71 MIDTERM REVIEW – MC 15. Elise is a self-employed business consultant who operates her business out of an office in her home. The home office passes the qualifying tests for deducting office in the home expenses. For the current tax year, Elise earns $90,000 from her business activities. She incurs $82,000 in supplies, travel expenses, wage expense, etc. Elise's mortgage interest and real estate taxes allocable to the home office space were determined to be $9,000. Also, other expenses including insurance, repairs and maintenance, utilities, and depreciation allocable to the home office space total $11,000. How much of the other expenses (insurance, repairs, etc.) can Elise deduct? a.$ b.$ 2,000 c.$ 8,000 d.$ 9,000 e.$11,000


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