Exam 9: Deductions: Employee and Self-Employed-Related Expenses

In terms of IRS attitude, what do the following expenses have in common? a. Cost of a CPA exam review course. b. Cost of a review course for the bar exam. c. Cost of a law degree by a taxpayer who does not intend to practice law.

Logan, Caden, and Olivia are three unrelated parties who claim the standard deduction. All are married and attend Citron University, and each pays tuition of $6,100. Of this payment, Logan can claim a deduction of $4,000; Caden a deduction of $2,000; and Olivia no deduction at all. Explain.

Under the actual cost method, which of the following expenses, if any, will not be allowed?

The work-related expenses of an independent contractor are treated as itemized deductions.

A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expenses.

Under the deemed substantiation method of accounting for expenses, what is the maximum amount taxpayers are allowed as a deduction without being required to substantiate the amount of the expenses?

Once set for a year, when might the IRS change the rate for the automatic mileage method?

In connection with the office in the home deduction of a self-employed individual, comment on the following: a. Mixed use (i.e., business and personal) of the portion of the home allocated to business. b. The difference between direct and indirect expenses for deduction purposes. c. The classification of the expense (i.e., dfor or dfrom AGI).

There are three limitations on the qualified business income deduction: an overall limitation (based on modified taxable income), another that applies to high income taxpayers, and a third that applies to certain types of services businesses.

Robert entertains several of his key clients on January 1 of the current year. Expenses that he paid are as follows: Cab fare \ 60 Cover charge at supper club 200 Dinner at club 800 Tips to waiter 160 Presuming proper substantiation, Robert's deduction is:

A worker may prefer to be treated as an independent contractor (rather than an employee) for which of the following reasons:

Eileen lives and works in Mobile. She travels to Rome for an eight-day business meeting after which she spends two days touring Italy. All of Eileen's airfare is deductible.

Carol is self-employed and uses her automobile solely for her business. If she uses the actual expense method to compute expenses, she can include any interest paid on the loan taken out to purchase the car.

Bob lives and works in Newark, NJ. He travels to London for a three-day business meeting after which he spends three days touring Scotland. All of his airfare is deductible.

Madison and Christopher are staff accountants at a major public accounting firm. Both are pursuing a law degree in a night program at the local law school. Madison contends that the cost of the program is a deduction for income tax purposes but Christopher maintains that it is not. Who is correct and why?

Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was away from home.

Christopher just purchased an automobile for $40,000 on which he plans to claim 100% as being for business use. To take advantage of MACRS and § 179, he plans to use the actual cost method for determining his deduction in the first year. In subsequent years, he will switch to the automatic mileage method. Comment on Christopher's proposed approach.

Taylor performs services for Jonathan on a regular basis. There exists considerable doubt as to whether Taylor is an employee or an independent contractor. a. What can Jonathan do to clarify the matter? b. Suppose that Jonathan treats Taylor as an independent contractor but Taylor thinks she is an employee. What is Taylor's recourse, if any?

Lily (self-employed) went from her office in Portland to Lisbon, Portugal, on business. While there, she spent part of the time on vacation. How much of the $5,000 airfare can she deduct based on the following assumptions: a. Lily was gone five days (i.e., three business and two personal). b. Lily was gone five weeks (i.e., four business and one personal). c. Lily was gone five weeks (i.e., three business and two personal).

Madison is an instructor of fine arts at a local community college. If she spends $600 (not reimbursed) on art supplies for her classes, $250 of this amount can be claimed as a deduction for AGI.