Federal Income Taxation Chapter 6 Solutions (Other Itemized Deductions)

7/25/2019 Federal Income Taxation Chapter 6 Solutions (Other Itemized Deductions)

1/14

2014 CCH Incorporated. All Rights Reserved.

Chapter 6 Other Itemized Deductions

1. or vice versa.

Solutions to Questions and Problems

1. The six elements include the (1) amount, (2) date, (3) place, (4) business purpose, (5) businessrelationship, and (6) identity of the individuals. 602.01.

2. a. When the reimbursement comes from an accountable reimbursement plan, the employee is nottaxed on the reimbursement. Martin is entitled to deduct the amount by which his deductible carexpenses [(4,300 $.56) = $2,408] exceed his $1,505 reimbursement. He deducts $903 as anemployee business expense. The deduction is taken as a miscellaneous itemized deduction onSchedule A (subject to the 2% AGI floor). 602.01.

b. When the reimbursement is made from a nonaccountable reimbursement plan, the employeeis taxed on the full amount of the reimbursement. Thus, the $1,505 would be included inMartin's gross income as additional taxable wages. Martin is allowed to deduct on Form 2106the $2,408 that he can substantiate as deductible car expenses. This amount is deducted as amiscellaneous itemized deduction (subject to the 2% AGI floor) on Schedule A. 602.02.

c. An accountable plan is one that requires employees (1) to account for (turn in) adequatesubstantiation for their business expenses, and (2) return any excess reimbursements. Thus, anonaccountable plan would be one where the employer advances the employee amounts anddoes not require any excess to be returned. A nonaccountable plan also would be one where

the employer reimburses employees without checking to see that proper documentation existsfor the expense. 602.01.

Chapter 6

3. a. $3,622 [(12,400 $.56) + $398 (12,400 $.30)]. 602.03.

b. $1,361 [($6,927 12,400/18,340) + $398 (12,400 $.30)]. 602.03.c. Because the standard mileage method produces a larger deduction, Shaun should use this

method to deduct his car expenses in 2014. However, he can only use the standard mileagemethod if he has not used an accelerated depreciation method to deduct car expenses in a

prior year with respect to this vehicle. 602.03.

d. If Shaun has used an accelerated method of depreciation in computing his car expenses withrespect to this car in a prior year, then he will be required to use the actual expenses methodto compute his car expenses for all subsequent tax years involving this vehicle. 602.03.


2/14

2 Essentials of Federal Income Taxation

Chapter 6 2014 CCH Incorporated. All Rights Reserved.

4. a. Under the actual expenses method, Ginger's car deduction would be $268 [($8,084

2,235/15,544 (2,235 $.40)]. Under the standard mileage method, her deduction would be

$358 [(2,235 $.56) (2,235 $.40)]. The standard mileage method produces a greaterdeduction. 602.03.

b. Since the reimbursement is made from an accountable plan, Ginger is not taxed on thereimbursement. If she wants to deduct the excess of her car expenses over the reimbursedamount, she will report both the business portion of her car expenses and the reimbursementon Form 2106. The excess amount would then be deducted as a miscellaneous itemizeddeduction on Schedule A. 602.03.

5. a. Only Ricardo's mileage between job one and job two is deductible. 12 miles (distance from firstto second job) 250 days = 3,000 total deductible business miles. 602.03.

b. $1,680 (3,000 $.56). 602.03.

6. a. $2,465. Since Josh's domestic trip was primarily for business, all of the airfare is deductible.However, only the business portion (60% of the travel time) of the other expenses is deductible.

602.05.Airfare $1,500

Lodging (60% $1,250) 750

Meals (60% $500) $300

Entertainment 130

$430

Less: 50% $430 (215) 215

Total misc. deduction (subject to the 2% AGI floor) $2,465

b. $1,865. Since the personal portion of the foreign travel exceeded 25%, Josh must allocate hisairfare between business and pleasure. The other expenses are calculated the same as in Parta. 602.05.

Airfare (60% $1,500) $ 900Lodging (60% $1,250) 750Meals (60% $500) $300Entertainment 130

$430Less: 50% $430 (215) 215Total misc. deduction (subject to the 2% AGI floor) $1,865

7. a. $1,340. Since her trip was not primarily for business, Katie is only allowed to deduct the business portion of her lodging and meals. She cannot deduct any of the $830 ($650 + $180) spent of


3/14

Textbook Solutions 3

2014 CCH Incorporated. All Rights Reserved. Chapter 6

traveling to and from the convention. Her business deduction is $1,340 [($200 6 nights) + (50% $40 7)]. 602.05.

b. $1,755. If her travels are outside of the U.S., Katie prorates all of her expenses between business and personal days. This would allow her to deduct an additional $415 ($830 7/14)for her airfare and transportation to and from the airport. 602.05.

c. $2,170. If Katie were to reduce her personal days by one, her six personal days would be 50%or less of her 13 total days gone. She would then be allowed to deduct the full $830 of hercosts of getting to and from her destination. 602.05.

d. $1,787. Her deductible airfare and transportation to and from the airport would increase to

$447 ($830 7/13). This would increase Katie's total deduction by $32 ($447 $415). 602.05.

8. Courtney can deduct $125 ($250 50%) for the concert tickets. It is not necessary that she attend

the concert with the client to claim the deduction. Because she did not dine with the other customer,she cannot deduct any of the $210. Courtney reports the $125 on Form 2106 along with any otheremployee business expenses she has for the year. She then deducts the total of her unreimbursedemployee business expenses as a miscellaneous deduction (subject to the 2% AGI floor) onSchedule A. 602.06.

9. a. If the taxpayer is currently employed as a CPA, the taxpayer has met the minimum educationrequirements for his or her current job. Also, the accounting courses will not qualify the taxpayerfor a new (i.e., different) trade or business. Since the courses are required by law for the taxpayerto maintain his or her status as a CPA, the $525 qualifies for the education expense deduction.

602.07.

b. Since the taxpayer is enrolled in a program of study that would lead to a new trade or business,the requirements for deducting the $3,500 as an education expense deduction have not beenmet. 602.07.

c. The taxpayer has already met the minimum education requirements for being a teacher.Furthermore, the courses will not qualify the taxpayer for a new trade or business. However,the courses will improve the taxpayer's present skills at his present job, so the $2,700 qualifiesfor the education expense deduction. 602.07.

d. Because the taxpayer is employed as an executive, he or she must already have met theminimum education requirements for the taxpayer's current job. Upon completion of theexecutive MBA program, the taxpayer will be qualified to be an executive - a position thetaxpayer already holds. Thus, the courses are not part of a program of study that will qualifythe taxpayer for a new trade or business. However, the courses will improve the executive'sskills at his or her current job, so the $8,000 qualifies for the education expense deduction.

602.07.

10. If Kris is currently employed as a manager, he can deduct the $1,700 as a miscellaneous itemizeddeduction (subject to the 2% AGI floor), regardless of whether his efforts result in a new position.If Kris is not currently employed as a manager, his job hunting costs are not deductible.


4/14



Therefore, in Parts a. and b. the deduction will be allowed; it Parts c. and d. it will not. 602.07.

11.Item Answer

12.

13.

a. Losson sale

of stock (203.03) A b. Interest on loan for vacation (505) Cc. Travel expense for a statutory employee (601) Ad. Depreciation on rental property (105.01) Ae. Charitable contribution to university (506) Bf. Cost of seminar for sole proprietor (105.01) Ag. Storm damage to rental property (105.01) A

14. a. A hobby is an activity from which a taxpayer does not expect to make a profit. The question of

whether a profit motive exists arises in cases where an activity has elements of both personal pleasure and profit. Some of the factors considered in determining whether an activity is a businessor a hobby include:

(1) The taxpayer's past success with other activities.(2) Whether separate books and records were kept for the activity.(3) Whether there have been both profits and losses in prior years.(4) The relative amount of pleasure derived from the activity.(5) The extent of dependency on the activity for financial support.

a.

b.

State inheritance taxes (504.04)

Transportation to and from home and work (602.03)

C

Cc. Rental of safe-deposit box (603) Bd. Fee to register for the CPA examination (602.07) Ce. IRS late-filing penalty (504.04) Cf. Fee to accountant for property tax return on rental property (105.01) Ag. Loss in operating bookstore (105.01) Ah. Auto registration for business automobile (105.01) A

Item Answer a. Cost of uniforms suitable for street wear (602.07) C

b. Insurance on personal residence (604.03) Cc. Union dues paid by employee (602.07) Bd. Travel expense by employee, no reimbursement (602.05) Be.f.

Mortgage interest on rental property (105.01)Loss of trees due to storm (507)

AB 1

g. Loss on sale of personal car (203.03) Ch. Amounts paid to fix friend's car (taxpayer's fault) (507) C1 After adjusting for $100 deductible and 10% of adjusted gross income.

Item Answer


5/14



(6) The amount of time and effort devoted to the activity.(7) The taxpayer's expertise in the area.(8) The amount of the occasional profits from the activity.(9) The expectation that the property used in the activity will rise in value.

The taxpayer must show that the activity is being pursued for profit but does not need to justifythat the expectation of profit is necessarily reasonable. The taxpayer does not need to show a

profit each year. If the activity shows a profit in any three of five consecutive years (two yearsout of seven for activities involving horses), the burden of proof shifts to the IRS. The IRS thenmust prove the activity is a hobby. 603.01.

b. No. However, if the activity shows a profit in any three of five consecutive years, the burden of proofshifts to the IRS to prove that the activity is a hobby. The taxpayer may also exercise an electionto postpone any IRS challenge until five years of business activity have been completed.

603.01.

15. a. Expenses of painting activity treated as a business:

Allocated expenses of the home:Property taxes $3,600 Electricity 2,400Heat 2,900 Total general household expenses $8,900 Business use

percentage 12%Portion of general expenses related to the painting activity $1,068Expenses related directly to the painting activity:

Interest on loan 140Painting supplies 1,750

Total expenses for the painting activity $2,958

If Russ's painting activity is treated as a business, he reports an above the line deduction for theloss of $658, computed as follows:

Revenues $ 2,300 Less: Total expenses (from above)(2,958)

Net loss $ ( 658)

Russ could deduct the loss on the assumption that the painting activity is a business, and expectsto report a profit in three of the first five years of the business. 603.01.

b. If Russ cannot justify the activity as a business, then he is required to report the $2,300 of revenuefrom the sale of the paintings as income. When an activity is considered a hobby, the taxpayer isallowed to deduct expenses up to the amount of the revenue (as a miscellaneous itemized deductionsubject to the 2% AGI floor), but any excess expenses would not be deductible. Thus, if the paintingactivity is treated as a hobby, Russ would report revenues and expenses as follows. 603.01.

Revenues $2,300Less: Total expenses ($2,958, but limited to hobby income) (2,300) The

allowable expenses ($2,300) are deductible as follows:


6/14



(1) $432 (12% $3,600) is deductible as property tax (line 6).(2) $1,868 (remainder) is deductible only to the extent that miscellaneous itemized deductions

exceed 2% of AGI.

c. Russ might support his claim that the painting activity is a business by arranging for regular displaysof his paintings in galleries and by making every effort to earn a profit in three of five consecutiveyears. If he has discretionary expenses related to the activity, such as subscriptions to art magazines,he might be able to postpone payments until early in the next year in order to show a profit in a givenyear to help meet the three-out-of-five-year profit rule. The timing of the payment of property taxesand electricity bills might also support the opportunity to show a profit in certain years. 603.01.

16. a. $354. Roger can include as itemized deductions $149 for transportation expenses (266 $.56) plus $205 [(50% $120) + $110 + $35] for meeting expenses, union dues, and her license. 603.01.

b. These expenses would be combined with other 2% miscellaneous itemized expenses suchas

safe deposit box rents, investment expenses (other than investment interest expense), and taxreturn preparation fees. The total of such costs can be deducted to the extent that it exceeds 2%of adjusted gross income. 603.01.

17. a. Mark reports the $1,400 of winnings and $1,400 of the losses on his income tax return. Allgambling winnings are included in gross income, but gambling losses are deductible only to theextent of gambling income. Gambling losses are miscellaneous itemized deductions, but are notsubject to the 2% AGI floor. 604.01.

b. The $1,400 of the winnings is entered as "Other income" on Form 1040. Only $1,400 of thelosses can be entered on Schedule A as a miscellaneous deduction not subject to the 2%

AGI floor. Deductions from AGI must be itemized in order for any gambling losses to bedeductible. 604.01.

18. See filled-in Form 2106 for Nancy Lopez. Since the $9,000 reimbursement was made from anonaccountable reimbursement plan, and therefore properly reported on Nancy's W-2, no amountis shown on Form 2106 (line 7). 602.08.

19. Taxpayers may deduct only the price of nonluxury box seats when they entertain clients in aluxury skybox rented for more than one event. Thus, Alpha-Beta may consider only $4,800 as itsentertainment cost for the rental of the skybox. This amount represents the cost of 96 seats (12seats for 8 games) at $50 per seat. It should also be pointed out that only 50% of the $4,800 is

actually deductible ($2,400).

See also page 13 of Publication 463.

20. a. False. Statutory employees report travel expenses on Schedule C. 601.

b. True. 602.01.

c. False. Only one-half is deductible. 602.06.


7/14



d. True. 602.07.

21. 603, 604.

1. Unreimbursed employee expenses, $1,044

[$376 + $115 + ($256 50%) + $340 + $85]2. Tax preparation fees, $175

3. Other expenses subject to the 2% AGI floor, $165 ($45 + $120)

4. Total expenses, $1,384

5. Less: 2% of AGI, $948 ($47,400 .02)

6. Deductible expenses, $436

7. Other miscellaneous expenses, $65 (limited to gambling winnings)22. See filled-in Schedule A for the Churches. Without proper substantiation for their $310

contribution to the United Way, no deduction can be taken. 605.


8/14



Form 2106, page 1 or Nancy Lopez


9/14



Form 2106, page 2 or Nancy Lopez Form 2106, page 2 or Nancy Lopez


10/14



IRS Publication 463, page 13


11/14



23. a. See filled-in Schedule A for the Gomezes. The Gomezes have ample net investmentincome to deduct the $2,000 of investment interest expense. 605.

Schedule A for the Churches


12/14



b.Adjusted gross income $376,181 Less: Itemized deductions * (52,152)

$324,029 Less: Exemption deduction ** ( 4,977)Taxable income $319,052

* Total itemized deductions are reduced by $2,134 (($376,181 $305,050 threshold forMFJ) 3%)

** Full exemption ($3,950 3) $11,850AGI $376,181AGI threshold for MFJ (305,050)Excess AGI $ 71,131Divide by $2,500 for MFJ 2,500

28.45Rounded to nearest whole number 29

.02.58

$11,850 (6,873)Exemption deduction $ 4,977


13/14



Cumulative Problem: Chapters 1-6

Schedule A for the Gomezes


14/14



Inga does not qualify as a dependent because she did not live with the Andersons for the entire year.

Frank is not taxed on the employer-paid premiums on group-term life insurance since the policy was forless than $50,000 ($54,500 75% = $40,875).

Form 2106 (line 22): 13,877 $.56 = $7,771

IRA deduction (Form 1040, line 32), $10,720 ($6,500 + $4,220). Since Sandra is not a participant in anemployer-sponsored retirement plan and the Andersons' modified AGI does not exceed $181,000, she isallowed to contribute and deduct up to $6,500 ($5,500 + $1,000 for being age 50 or older). However,Frank is a participant in his employer's retirement plan and the Andersons' modified AGI falls betweenthe $96,000 and $116,000 threshold for married couples filing a joint return. Thus, Frank's maximumdeductible IRA contribution is computed as follows:

Reduction factor for Frank:

[($100,685 $96,000)/$20,000 phase-out range] $5,500 = $1,288 Contribution

limit:

$5,500 $1,288 = $4,212, rounded up to nearest $10: $4,220

Federal Income Taxation Chapter 6 Solutions (Other Itemized Deductions)

Documents