Discuss the definition of a trade or business. Why does it matter whether a taxpayer is classified as an employee or as self-employed?
A trade or business is any activity that is engaged in for profit continually and regularly. The income from a sole proprietorship is netted with related ordinary and necessary business expenses to determine the effect on AGI. Expenses for employees would
Discuss the concepts of ordinary, necessary, and reasonable in relation to trade or business expenses.
According to �162, in order for an expense to be deductible it must be an ordinary and necessary expenditure. The expense must also be reasonable (as established by the courts). A trade or business expense must not only be ordinary and necessary but also
On what form is depreciation reported, and how does it relate to other forms such as Schedules C, E, F, and Form 2106?
Depreciation is reported on Form 4562, and the expenses flow from that form to other schedules such as Schedules C, E, F, and Form 2106 that may be used in the tax return. Depreciation is the expense allowed for the wear or loss of usefulness of a busines
On what type of property is depreciation allowed?
Depreciation is allowed on trade or business property or assets used for the production of income including (but not limited to) buildings, race horses, breeding hogs, automobiles, railroad tracks, sawmill equipment, water transportation equipment, wastew
Discuss the word basis in relation to the financial accounting term book value. What is meant by the term adjusted basis?
Basis is similar to book value. Typically, the depreciable basis of property is the initial cost of the property. Adjusted basis is the cost basis less any accumulated depreciation.
Discuss the difference between personal property and real property. Give examples of each.
Real property consists of land and buildings as well as any other structural components attached to land. Personal property includes equipment, furniture, and fixtures, or anything else that is not classified as real property.
What is a depreciation convention? What conventions are available under MACRS?
A depreciation convention is a concept that is used to determine the amount of a partial year allowed in the tax depreciation calculation. Available conventions include the half-year convention, the mid-quarter convention, and the mid-month convention.
When calculating depreciation for personal property (assuming the half-year convention) using the IRS depreciation tables, does the taxpayer need to multiply the first year table depreciation percentage by one-half? What about in the year of disposal, ass
The half-year convention for the first year is built into the depreciation tables issued by the IRS. However, in the year of disposal, the table percentage must be multiplied by � for the half-year convention and the appropriate months for mid-quarter and
Discuss the concept of electing �179 expense. Does the election allow a larger expense deduction in the year of asset acquisition?
The taxpayer can elect to expense a certain portion of personal property purchased during the year (the election cannot be made for real property). The maximum yearly deduction is determined in IRC �179(b)(1) and is $500,000 for 2015. The expense election
Discuss the concept of listed property.
Listed property is defined as any passenger automobile or other property used as a means of transportation, property used for entertainment (boat), computer or peripheral equipment, or any cellular telephone or other telecommunications equipment.
Distinguish between travel and transportation expenses.
Travel expenses are different from transportation expenses in that travel involves the overnight stay for business purposes. The basic travel requirement is that the trip requires sleep or rest.
When can a taxpayer use the standard mileage rate? Is the standard mileage rate better than the actual auto costs?
A taxpayer can use the standard mileage rate if the taxpayer owns the vehicle and uses the standard mileage rate for the first year it was placed in service or if the auto is leased, the standard mileage rate must be used for the entire lease period. The
Discuss the limits on meals and entertainment. Are meals and entertainment expenses always limited to 50%?
Generally, any business meals and entertainment expenditures are limited to 50% of the amount incurred. The 50% limit pertains to any expense for food or beverage and to any expense with respect to an activity that is generally considered to constitute en
Discuss the limits on home office expense deductibility.
Home office expenses that would not otherwise be deductible (such as insurance, utilities, and depreciation) are limited to the gross income from the business use of the home. The gross income is first reduced by regular trade or business expenses (not re
Why were the hobby loss rules established? What factors determine whether an activity is a trade or business or a hobby? Is any one factor controlling?
Congress established the hobby loss rules in order to limit deductible losses from activities that are primarily for personal pleasure instead of a trade or business. Some of the factors that determine whether an activity is to be considered a hobby or a
What are the two components of the self-employment tax? Is either component limited?
Self-employment tax consists of two parts, the Social Security tax and the Medicare tax. The tax base for the Social Security tax is limited. In tax year 2015, only the first $118,500 of wages and self-employment income is subject to the Social Security t
Trade or business expenses are treated as
a. A deduction for AGI.
b. An itemized deduction if not reimbursed.
c. A deduction from AGI.
d. A deduction from AGI limited to the amount in excess of 2% of AGI.
Answer: a
Which of the following is not a "trade or business" expense?
a. Interest on investment indebtedness.
b. Property taxes on business equipment.
c. Depreciation on business property.
d. Cost of goods sold.
Answer: a
On May 5, 2010, Jill purchased equipment for $40,000 to be used in her business. She did not elect to expense the equipment under Section 179 or bonus depreciation. On January 1, 2015, she sells the equipment to a scrap metal dealer. What is the cost reco
Answer: b
Feedback: $40,000 x 8.92% x � = $1,784
On April 15, 2013, Andy purchased some furniture and fixtures (7-year property) for $10,000 to be used in his business. He did not elect to expense the equipment under �179 or bonus depreciation. On June 30, 2015, he sells the equipment. What is the cost
Answer: b
Feedback: $10,000 x 17.49% x � = $874.50
Lawrence purchased an apartment building on February 10, 2015, for $330,000, $30,000 of which was for the land. What is the cost recovery deduction for 2015?
a. $ 0.
b. $ 6,741.
c. $ 9,546.
d. $10,660.
Answer: c
Feedback: $300,000 x 3.182% = $9,546
Roy purchased an office building on March 30, 2012, for $250,000. $25,000 of which was for the land. On July 30, 2015, he sold the office building. What is the cost recovery deduction for 2015?
a. $0.
b. $3,125.
c. $5,769.
d. $6,410.
Answer: b
Feedback: Fourth year, 6.5 months. ($225,000 x 2.564% x 6.5/12) = $3,125
On June 30, 2015, Ken purchased an apartment building for $500,000. Determine the cost recovery deduction for 2015:
a. $4,925.
b. $5,335.
c. $6,955.
d. $9,850.
Answer: d
Feedback: $500,000 x 1.970% = $9,850
During the year, Cory purchased a log skidder (7-year property) for $55,000 for his business. Assume that he has income from his business of $30,000, and he and his wife have combined salaries and wages income of $40,000. What is the maximum deduction he
Answer: d
Feedback: $55,000. He could take Section 179 up to the limit ($500,000 in 2015) against active income. Wages and salary are considered active income so the answer would be $55,000.
Section 179 expense is available for all of the following business assets except
a. Office building.
b. Office furniture.
c. Computer.
d. Delivery truck.
Answer: a
Jordan has two jobs. She works as a night auditor at the Moonlight Motel. When her shift at the motel is over, she works as a short-order cook at the Greasy Spoon Restaurant. On a typical day, she drives the following number of miles:
Home to Moonlight Mo
Answer: b
Which of the following is false with respect to the standard mileage rate?
a. It can be used if the taxpayer owns the vehicle and uses the standard mileage rate for the first year it was placed in service.
b. It includes parking fees, tolls, and property
Answer: b
Frank purchased a vehicle for business and personal use. In 2015, he used the vehicle 70% for business (11,000 business miles incurred equally throughout the year) and calculated his vehicle expenses using the standard mileage rate. Frank also paid $1,800
Answer: c
Feedback: (11,000 miles x 57.5 cents/mile) + 70% (1,800 + 480) = $7,921
Which of the following is not a relevant factor to be considered in deciding whether an activity is profit seeking or a hobby?
a. Manner in which the taxpayer carries on the activity.
b. Expertise of the taxpayer or his or her advisers.
c. Time and effort
Answer: d
Which of the following individuals can deduct education expenses?
a. A real estate broker who attends college to get an accounting degree.
b. A CPA who attends a review course to obtain his building contractor's license.
c. A corporate executive attending
Answer: c
Annie is self-employed and has $58,000 in income from her business. She also has investments that generated dividends of $3,000 and interest of $2,500. What is Annie's self-employment tax for the year?
a. $8,195.
b. $8,619.
c. $8,874.
d. $8,972.
Answer: a
Feedback: $58,000 x 92.35% x 15.3% = $8,195