Chapter 6
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
89. Joline works as a sales manager for the Washington Manufacturing Company. Although the company has an
accountable reimbursement plan, as a cost containment measure the company will only reimburse its sales personnel for
80% of their business expenses. During the year, Joline incurred the following business expenses:
Airfare
Hotels
Meals
Entertainment
If Joline’s adjusted gross income is $62,000, what amount can Joline deduct as a miscellaneous itemized deduction?
a.
$320
b.
$540
c.
$890
d.
$1,560
e.
$1,780
a
90. Mathew works for Levitz Mortgage Company. The company has an accountable reimbursement plan. During the year
Levitz reimburses Mathew $5,400 for his business expenses. Mathew’s adjusted gross income for the year is $45,000. His
business expenses are as follows:
Airfare
$2,900
Hotel
1,900
Meals
1,400
Entertainment
1,000
What amount will Mathew be able to deduct as a miscellaneous itemized deduction?
a.
$- 0 –
b.
$600
c.
$1,200
d.
$1,500
e.
$1,800
91. Brenda travels to Cleveland on business for her employer. She spends 4 days in meetings with a client. Brenda’s plane
fare for the trip is $400. Meals cost $40 per day. Hotel and incidental costs amount to $150 per day. Brenda receives no
reimbursement for any expenses. Brenda’s adjusted gross income for the year is $40,000. What is Brenda’s deduction for
the trip?
a.
$- 0 –
b.
$280
c.
$1,080
d.
$1,160
e.
$2,320
92. Charlie is single and operates his barber shop as a sole proprietorship. During the current year, Charlie paid $2,200 for
his personal health insurance plan and $4,000 for health insurance for his employees. How much of these premiums can
be deducted for Charlie’s adjusted gross income?
a.
$- 0 –
b.
$2.200
c.
$4,000
d.
$5,100
e.
$6,200
e
93. Margaret is single and is a self-employed proprietor of a convenience store near the mall. During the current year,
Margaret paid $4,000 for health insurance coverage for herself. She paid another $500 for coverage for her unrelated
employee, Corky. How should Margaret deduct the health insurance cost?
I.
Margaret takes $500 as a business expense.
II.
Margaret takes the $4,000 as a deduction for AGI.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
94. Kyle is married and a self-employed landscaper. During the current year, Kyle pays $3,000 for health insurance
coverage for himself. He pays another $400 for coverage for his employee, Tabatha. How should Kyle deduct the health
insurance cost?
I.
Kyle deducts a total of $3,400 for AGI.
II.
Kyle cannot deduct any portion of his premium of $3,000 for AGI if his spouse is covered
by a health plan through her employer.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
95. Oliver owns Wifit, an unincorporated sports store. In 2015 Wifit earned $100,000, before Oliver drew out a salary of
$60,000. What is Oliver’s 2015 deduction for self-employment taxes?
a.
$2,826
b.
$7,065
c.
$7,650
d.
$14,130
e.
$15,300
96. Concerning individual retirement accounts (IRAs),
I.
A single taxpayer that is not an active participant in a qualified plan may deduct up to
$6,000 of the annual contribution.
II.
A taxpayer that is not working outside of the home may not deduct any amount if their
Chapter 6
spouse is an active participant in a qualified plan, unless their AGI is below $61,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
97. Rhonda and Ralph are married. Rhonda earns $81,000 annually, and Ralph earns $6,000 annually working part-time.
Their AGI is $108,000. Rhonda participates in an employer-sponsored retirement plan. Ralph’s company does not have a
pension plan. Rhonda and Ralph contribute the maximum amount allowable annually to their IRAs. What is their
allowable deduction for this year’s contributions?
a.
$0 –
b.
$2,200
c.
$5,500
d.
$8,000
e.
$11,000
c
98. Chi is single and an employee of Federal Company. Chi’s adjusted gross income for the current year is $63,000. Chi
would like to make the maximum contribution to his individual retirement account this year. Which of the following
statements about Chi’s contribution and deduction amounts is (are) true?
I.
He is not allowed to make an IRA contribution because his adjusted gross income is greater
than $61,000.
II.
If Federal Company does not have a qualified pension plan; Chi can contribute and deduct
a maximum of $5,500 to his IRA account.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
99. Chelsea is an employee of Avondale Company. Chelsea’s adjusted gross income for the current year is $65,000.
Chelsea would like to make the maximum contribution to her individual retirement account this year. Which of the
following statements about Chelsea’s contribution and deduction amounts is (are) true?
I.
If Chelsea is single and is covered by a qualified pension plan, she is allowed to contribute
$5,500 to her IRA account, but she is allowed a deduction for only $3,300 of the
contribution because her adjusted gross income is greater than $61,000.
II.
If Chelsea is married and covered by a qualified pension plan and her husband does not
work, they can contribute and deduct $5,500 to two separate IRA accounts (one for herself
and one for her husband).
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
100. Darlene and Devin are married. Darlene earns $48,000 and Devin earns $41,000. Their adjusted gross income is
$97,000. Darlene’s employer provides her with a qualified pension plan, Devin’s does not. What are Darlene and Devin’s
maximum combined IRA contribution and deduction amounts?
Contribution Deduction
a.
$11,000 $5,000
b.
$11,000 $6,000
c.
$11,000 $8,000
d.
$11,000 $10,725
e.
$11,000 $11,000
e
101. Aaron is a 34-year-old head of household and a self-employed taxpayer. He contributed the maximum amount to his
IRA account during the current year, and his net earnings from his business totaled $29,000. How much can Aaron deduct
for AGI this year?
a.
$- 0 –
b.
$3,200
c.
$3,800
d.
$5,000
e.
$5,500
e
102. Hector is a 54-year-old head of household and a self-employed taxpayer. He contributed the maximum amount to his
IRA account during the current year, and his net earnings from his business totaled $36,000. How much can Hector
deduct for AGI this year?
a.
$- 0 –
b.
$3,200
c.
$5,500
d.
$6,000
e.
$6,500
e
103. Arturo and Josephina are married with salaries of $47,000 and $48,000, respectively. Their combined AGI is
$101,000. Josephina is an active participant in her company’s qualified pension plan while Arturo is not. Determine
Arturo and Josephina’s combined IRA contribution and deduction amounts?
Maximum Maximum
Contribution Deduction
a.
$5,500 $2,750
b.
$11,000 $2,750
c.
$11,000 $5,500
d.
$11,000 $10,175
e.
$11,000 $11,000
104. Fred and Irma are married with salaries of $49,000 and $44,000, respectively. Their combined AGI is $108,000.
Both are active participant in their companies’ qualified pension plans. Determine their maximum combined IRA
contribution and deduction amounts?
Chapter 6
Maximum Maximum
Contribution Deduction
a.
$5,500 $ 2,750
b.
$11,000 $2,750
c.
$11,000 $5,500
d.
$11,000 $7,500
e.
$11,000 $11,000
105. Marshall and Michelle are married with salaries of $80,000 and $64,000, respectively. Their combined AGI is
$183,000. Michelle is an active participant in her company’s qualified pension plan while Marshall is not. Determine the
maximum combined IRA contribution and deduction amounts?
Maximum Maximum
Contribution Deduction
a.
$5,500 $2,750
b.
$11,000 $5,500
c.
$5,500 $5,500
d.
$11,000 $7,500
e.
$ 11,000 $ 11,000
106. Mark and Cindy are married with salaries of $45,000 and $42,000, respectively. Adjusted gross income on their
jointly filed tax return is $98,000. Both individuals are active participants in employer provided qualified pension plans.
What is the maximum amount each person may deduct for AGI with regard to IRA contributions?
Mark Cindy
a.
$1,000 $1,000
b.
$5,225 $5,225
c.
$3,200 $3,200
d.
$- 0 – $-0-
e.
$ 5,500 $5,500
107. Dan and Dawn are married and file a joint return. During the current year, Dan had a salary of $30,000 and Dawn
had a salary of $36,000. Both Dan and Dawn are covered by an employer-sponsored pension plan. Their adjusted gross
income for the year is $95,000. Determine the maximum IRA contribution and deduction amounts.
Maximum Maximum
Contribution Deduction
a.
$11,000 $11,000
b.
$11,000 $- 0 –
c.
$11,000 $5,500
d.
$5,500 $-0-
e.
$8,000 $8,000
108. Carl, age 59, and Cindy, age 49, are married and file a joint return. During the current year, Carl had a salary of
$41,000 and Cindy had a salary of $35,000. Both Carl and Cindy are covered by an employer-sponsored pension plan.
Their adjusted gross income for the year is $94,000. Determine the maximum IRA contribution and deduction amounts.
Maximum Maximum
Contribution Deduction
a.
$12,000 $12,000
b.
$11,000 $11,000
c.
$12,000 $11,000
d.
$11,000 $9,000
e.
$13,000 $13,000
a
109. Kevin, single, is an employee of the Colonial Company and is an active participant in its pension plan. Kevin’s
adjusted gross income for the current year is $59,000. Kevin contributes $1,000 to his conventional individual retirement
account. Which of the following statements about Kevin contributions and deduction amounts is (are) true?
I.
He is allowed to deduct his $1,000 contribution to his conventional IRA.
II.
Kevin can also contribute but not deduct $4,500 to his Roth IRA.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
110. Mollie is single and is an employee of the Royal Corporation. She is an active participant in the company’s pension
plan. Mollie’s adjusted gross income is $116,000 and she has never established an IRA account. How much can Mollie
contribute to a Roth IRA?
a.
$- 0 –
b.
$1,000
c.
$2,750
d.
$4,400
e.
$5,500
e
111. Margie is single and is an employee of the Stitch Corporation. She is an active participant in the company’s pension
plan. Margie’s adjusted gross income is $65,000 and she contributes the maximum amount allowable as a deduction to her
IRA account during the current year. How much can Margie contribute to her Roth IRA?
a.
$- 0 –
b.
$1,000
c.
$2,200
d.
$4,000
e.
$5,500
c
112. Fred and Flossie are married and their adjusted gross income is $194,000. Both Fred and Flossie are active
participants in their company’s qualified pension plan and have never established an Individual Retirement Account. What
is the maximum combined amount they can contribute to Roth IRAs?
Chapter 6
a.
$- 0 –
b.
$2,000
c.
$5,500
d.
$8,000
e.
$11,000
a
113. Homer and Marge are married and have an adjusted gross income of $183,000. Currently, neither is covered by an
employer sponsored pension plan. They have never established an Individual Retirement Account until this year, when
they opened a Roth IRA. What is the maximum amount they can each contribute to Roth IRAs?
a.
$1,000
b.
$2,000
c.
$2,750
d.
$4,950
e.
$5,500
e
114. Alex and Alicia are married and have two children ages 5 and 9. Their adjusted gross income for the year is $86,000.
During the year they establish a Coverdell Education Savings Account (CESA) for each child.
I.
They can contribute $2,000 to each child’s CESA.
II.
They can deduct the CESA contributions for their adjusted gross income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
115. Laura and Jason are married and have 3 children ages 2, 6, and 8. Their adjusted gross income for the year is
$95,000. The maximum they can contribute to their children’s Coverdell Education Savings Accounts is
a.
$- 0 –
b.
$667
c.
$1,500
d.
$2,000
e.
$6,000
e
116. James has three nieces, ages 11, 16, and 19 and is single. His adjusted gross income for the year is $100,000. The
maximum he can contribute to their Coverdell Education Savings Accounts is
Each Account Total Contribution
a.
$1,333 $2,667
b.
$1,333 $4,000
c.
$2,000 $4,000
d.
$2,000 $6,000
e.
$6,000 $6,000
117. Phil and Faye are married and have 3 children ages 11, 14, and 17. Phil and Faye’s adjusted gross income for the
year is $200,000. The maximum they can contribute to their children’s Coverdell Education Savings accounts is
Each Account Total Contribution
a.
$- 0 – $-0-
b.
$1,333 $4,000
c.
$2,000 $4,000
d.
$2,000 $6,000
e.
$6,000 $6,000
118. Carlos is single and has a 7 year-old child. Carlos’ adjusted gross income for the year is $101,000. The maximum
amount he can contribute to his child’s Coverdell Education Savings Account is
a.
$- 0 –
b.
$800
c.
$1,200
d.
$2,000
e.
$4,000
c
119. Karen is single and graduated from Marring University in May of 2014. In January of 2015, she begins repaying her
student loans and in 2015 pays $2,800 of interest on the loans. Her adjusted gross income is $51,000.
I.
Karen can deduct $2,500 of interest as a deduction for adjusted gross income.
II.
Karen can deduct $2,800 of interest as a deduction from adjusted gross income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
120. Victor is single and graduated from Wabash College in May of 2014. In January of 2015, he begins to repay his
student loans. During the year he pays $1,500 of interest on the loans. His adjusted gross income for the year is $65,000.
Victor can deduct student loan interest of
a.
$- 0 –
b.
$800
c.
$1,000
d.
$1,200
e.
$1,500
c
121. Martha is single and graduated from Ivy Tech in May of 2014. In January of 2015, she begins repaying her student
loans and pays interest on the loans of $2,600 in 2015 and $1,200 in 2016. Her adjusted gross income in 2015 is $63,000
and is $80,000 in 2016. Martha can deduct student loan interest of
2015 2016
a.
$- 0 – $-0-
b.
$2,000 $1,200
Chapter 6
c.
$2,500 $1,200
d.
$2,000 $-0-
e.
$2,500 $-0-
122. Which of the following is (are) correct concerning the time test for deducting moving expenses?
I.
Self-employed individuals must work in the new location for 39 weeks during a 2-year
period.
II.
A transfer of the employee by the employer waives the time requirement.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
123. Thomas changes jobs during the year and moves from Philadelphia to El Paso. Which of the following expenses
relating to the move can Thomas deduct?
I.
Prior to the move, Thomas flies to El Paso to find an apartment.
II.
The cost of meals while driving his household goods to El Paso.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
124. Carla changes jobs during the year and moves from Oklahoma City to Orlando. Which of the following expenses
relating to the move can Carla deduct?
I.
Upon arriving in Orlando, her apartment is not ready so she spends 2 nights in a local
hotel.
II.
Gas and tolls during the move to Orlando.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
125. Jay obtains a new job in Boston and moves from Reno during the current year. He incurs the following moving
expenses:
Transportation of household goods
House-hunting trips to Boston
Cost of transporting Jay’s family
Meals incurred while moving the family
Temporary living expenses while waiting for the new residence to be ready
What is Jay’s moving expense deduction?
a.
$- 0 –
Chapter 6
b.
$5,700
c.
$8,000
d.
$9,700
e.
$9,800
c
126. Julian and Deloris move during the current year from their home in Houston to Santa Fe. Julian was a rocket scientist
with NASA in Houston and has accepted a new job with the Los Alamos research lab near Santa Fe. Moving expenses
and reimbursement information are presented below.
•
Direct costs of moving themselves, furnishings and other personal belongings to Santa Fe total
$8,000.
•
A house-hunting trip before their move to Santa Fe resulted in the total costs of $2,500.
•
Julian and Deloris incurred commissions and legal costs in the amount of $12,000 in
conjunction with the sale of their Houston residence.
•
Los Alamos research laboratories reimbursed Julian and Deloris for $5,000 of their moving
costs.
What is their Moving Expense deduction?
a.
$17,500 deduction from AGI.
b.
$8,000 deduction for AGI.
c.
$10,500 deduction from AGI.
d.
$3,000 deduction for AGI.
e.
$22,500 decution from AGI.
127. For each of the following situations, determine whether the item is deductible, how it would be deducted on the
taxpayer’s return (if there are alternatives possible, discuss the conditions which would determine the treatment) and any
limitations that might be placed on the deduction.
a.
Monica took a client out to dinner to discuss the tax aspects of the client’s proposed
acquisition of a rival company. After dinner, Monica took the client to see a play.
1.
Assume Monica is self-employed
2.
Assume Monica is an employee of GHQ Corporation. GHQ does not reimburse its
employees for entertaining clients.
b.
Sergio owes Edward $5,000. During the current year, Sergio files for bankruptcy.
Sergio’s attorney indicates that due to Sergio’s poor financial condition his creditors will
be lucky to get $.80 on the dollar for their debts.
1.
Assume Sergio is a customer of Edward’s (an accrual basis taxpayer) and the $5,000
debt is from an account receivable related to Edward’s business.
2.
Assume Sergio is a business associate of Edward’s. Edward loans Sergio the $5,000 to
pay off some gambling debts. Edward owns a meat packing plant.
a.
2.
Chapter 6
itemize her deductions and Monica’s total allowable miscellaneous itemized deductions
must exceed 2% of adjusted gross income.
year of partial worthlessness as an ordinary business expense. Edward can deduct $1,000
[$5,000 × (1 – .80)] as an estimate of the ultimate bad debt expense.
deduct any of the bad debts until the actual amount of worthlessness is known.
128. Phong is a life insurance salesman for Swan Insurance and spends 4 days a month in the office. His office is 12 miles
from home. He also has a part-time job as a salesman in a clothing store. Typically, he works 2 nights during the week
and 1 day on the weekend. The clothing store where he works is 6 miles from his office and 7 miles from his home. What
portion(s) of Phong’s travel is (are) considered business?
home, as he does 4 days a month, is considered commuting and is nondeductible. However, the cost of
commuting. Finally, any out-of-town traveling Phong incurs is fully deductible.
129. Jerry recently graduates with an MBA degree from a leading university and will be going to work as an employee of
a major stock brokerage firm. Jerry is unsure of the circumstances under which he can legitimately deduct the costs of
entertaining and dining with clients and prospective clients. Jerry will spend approximately $5,000 a year on such
activities for which he will not be reimbursed. It is important that he be able to derive tax benefit for these costs. Advise
Jerry of the general rules in this area of the tax law. Include a brief discussion of substantiation requirements for such
business expenses.
130. For each of the following situations, determine whether the item is deductible, how it would be deducted on the
taxpayer’s return (if there are alternatives possible, discuss the conditions which would determine the treatment) and any
limitations which might be placed on the deduction.
a.
Cassie sells insurance and other financial products for Bison Assurance Company. During the
current year, she gives each client who has been with her for three years 2 tickets to a Willie
Nelson concert. The tickets have a face value of $75 each, but Cassie has to pay $100 per ticket
to obtain a block of 100 tickets. Cassie was out of town and did not attend the concert.
b.
Randolph was the CEO and chairman of the board of directors of Vison Inc., until his
retirement 5 years ago. Although he still owns 5% of Vison’s stock, he has no other active
Chapter 6
involvement in the company. While playing golf one day he learns that 4 of the company’s
biggest customers are coming to town to close a big deal. Randolph had been responsible for
bringing 3 of the customers to the business 30 years earlier when he started working for the
company. Because he has developed a solid business relationship with them through the years
and to help the company out, he holds a reception for the 4 customers and top executives of the
company at his country club. The cost of the reception is $2,000. Randolph did not ask for, nor
did Vison offer, a reimbursement for the reception.
c.
Ai-leng is an engineer employed by Boiler Corporation. While having lunch with one of
Boiler’s clients, she learns of a new relaxation technique that the client felt had greatly reduced
his job-related stress. Ai-leng enrolls in a night course at the local community college to learn
the new relaxation technique. The cost of the course is $200.
income limitation.
b.
ordinary (investors normally do not entertain clients of the company they own), or necessary (a
The cost of the course is not deductible. To deduct education expenses, the course must either
131. For each of the following situations explain why the expenditure is or is not deductible and any limitations that may
be placed on the amount of the deduction.
a.
Akira is self-employed as a personal financial planner. He went out–of-town for two days
to visit three of his best clients and incurs the following expenses:
Airfare
$350
Rental car
160
Lodging
240
Incidentals
90
Meals
220
Entertainment
130
b.
Woodrow is President and CEO of ISPEP, a closely held corporation with assets of
$20,000,000. Woodrow, who owns 60% of the company, decides to hire his twin daughters
who have just completed their freshman year at Aztec State to work in the promotions
department of the company. His daughters will be paid $5,000 each for the summer. Other
college students who are hired for the summer to perform similar tasks will be paid $4,000.
c.
Felix is a Realtor. To show his appreciation, he gives each client who buys a home from
him a $75 wall clock. During the year Felix gives 64 clocks to his clients.
d.
Sandy sues Harrison for divorce. Originally, Sandy asks for one-half of all their assets,
including 50% of Harrison’s car dealership. Harrison’s lawyer has worked out a
Chapter 6
compromise with Sandy and her attorney that allows Harrison to retain 100% ownership of
the dealership. Harrison pays his lawyer $10,000 in legal fees.
a.
Akira can deduct the full cost of the airfare ($350), rental car ($160), lodging ($240), and
for adjusted gross income $1,015 ($350 + $160 + $240 + $90 + $175) for his trip.
$4,000. Therefore, the additional compensation of $1,000 ($5,000 – $4,000) paid to each
daughter is not deductible because it lacks a business purpose. Under the substance over
gift ($1,000 each) from Woodrow to his daughters. The gift to his daughters is excluded
Harrison may not deduct any portion of the legal fees because the legal dispute originates
which is a business asset, does not affect the tax treatment.
132. For each of the following situations explain why the expenditure is or is not deductible and any limitations that may
be placed on the amount of the deduction.
a.
Ellis is a part-time bookkeeper for Gilmore Company. The owner of Gilmore told Ellis that
if he earns an accounting degree and passes the CPA exam, he would hire him as Gilmore’s
accountant. Ellis spends $5,600 taking classes towards an accounting degree at City
College.
b.
Harry owns Circus City Condiments, a wholesaler of circus food. In 2010 he loaned his
friend Joanna $8,000 at 6% annual interest with the balance due in 5 years. Joanna used the
loan to open a beauty salon. In December 2015, Joanna tells Harry that she has filed for
bankruptcy and that he will be lucky to get $2,000 of his money back. The bankruptcy
proceedings had not been completed at the end of 2015.
c.
Audrey is a self-employed computer consultant. Harvey calls Audrey and asks her for
information on installing a new Lan-based workstation system in his business. Audrey
meets Harvey at Franco’s Chop House. They have dinner while Audrey explains how such a
system will work and what it will cost. Audrey pays for the dinner, which costs $100.
Harvey calls Audrey the next day and tells her that he has decided that the system costs too
much and that he will not need her services.
a.
Because he is not currently an auditor with Gilmore Company, Ellis’s education expenses
trade or business) and are not deductible.
year in which the actual amount of worthlessness is determined. Because the actual amount
deduction related to the loan in 2015.
133. Roscoe is a religion professor. During the summer, he spends 3 months in Israel touring historical landmarks. The
cost of the summer trip includes $1,300 for airfare, $2,750 for lodging, $1,175 for meals, and $850 for incidental
expenses. The following semester he incorporates many of the items he collected and the knowledge he gained from his
experiences into his lectures. How much of the travel costs can Roscoe deduct? Explain.
None of the costs that Roscoe incurred are deductible travel expenses. Travel, as a form of education, is
134. For each of the following situations, determine whether the expenses are deductible as an education expense.
Explain.
a.
Marvin owns a real estate development firm and his adjusted gross income is $60,000. He
enrolls as a part-time student at Northern College. His primary motivation for taking the
classes is to obtain a greater understanding of the accounting issues associated with his real
estate development business. He also believes that he can save 25% of the amount he pays in
accounting expenses. The cost of the 2 courses he enrolls in is $900.
b.
Nancy is employed as a computer manager for a data processing company and her adjusted
gross income is $90,000. She enrolls in a night course ($225) at the local college. The course
is not required by her employer, but does improve her job skills.
c.
Janine is a recent graduate of Western University and has been hired by a local accounting
firm. The firm expects Janine to pass the CPA exam on her initial attempt. To help her
prepare for the CPA exam, she takes the Booker CPA Review Course that costs $1,500.
d.
Cam runs a licensed day-care center. To maintain his license he is required to attend a
minimum of 30 hours a year of continuing education. During the year, Cam attends 40 hours
of continuing education seminars at a cost of $1,500.
The education expenses will help Marvin in his business by improving his job skills. Therefore,
c.
Even though Janine is an accounting graduate and is working in a local CPA law firm, she is
135. Sally and Kelly are both enrolled in a graduate accounting course at Deacon University. Discuss how it is possible
The meal is a directly related business expense. The meal had a clear business purpose and
discussion. The fact that she does not ultimately receive Harvey’s business is not relevant.
Chapter 6
that Sally can deduct the cost of her tuition as an education expense while Kelly’s tuition is not deductible.
136. Amanda is the president and 60% owner of ANR, a closely held corporation. During the year, she is paid a salary of
$650,000. Her salary is 40% higher than that for executives of comparably sized companies in the industry. ANR has
experienced 4 straight years of increased sales growth, at 3% per year, while other companies in the industry have
experienced decreasing or level sales. Discuss what factors are used to determine whether Amanda’s salary represents
reasonable compensation.
137. Sita loans her next-door neighbor, Ivan, $800 to pay his rent and cover his utilities for last month. Ivan promises Sita
he will repay her at the end of next month when he receives his next payroll check. Two weeks after loaning Ivan the
money, Sita discovers Ivan had left town. No one knows his whereabouts. Sita is told that Ivan also hasn’t paid his rent or
utility bills. Discuss whether Sita can deduct the $800. Completely explain your reasoning.
138. Walter is a cash basis taxpayer with a drapery cleaning business. In the current year he determines he will never
receive payment from Davis for cleaning services provided to Davis. Can Walter record a deduction for the bad debt?
Explain.
139. For each of the following situations, determine whether the item is deductible, how it would be deducted on the
taxpayer’s return (if there are alternatives possible, discuss the conditions that would determine the treatment) and any
limitations, which might be placed on the deduction.
a.
Allison is self-employed. She pays the following
taxes during the current year:
State income tax
$1,200
Federal income tax
4,000
Self-employment tax
3,200
Property tax on residence
700
Tax on business equipment
200
b.
A customer who owed Leon $5,000 declared
bankruptcy last year. At that time, the customer’s
accountant estimated that only 40% of the
customer’s debts would be paid. In the current year,
Leon receives $1,000 from the bankruptcy court as
final payment on the $5,000 debt.
would deduct $3,000 ($5,000 × 60%) last year as a bad debt expense. In the current year, he
debt expense.
140. For each of the following IRA situations, determine the amount the taxpayer can deduct. Discuss any limitations,
which might be placed, on the deduction.
a.
Marissa is single and is an active participant in a qualified employee pension plan. Determine
the maximum Roth IRA contribution that she can make if her adjusted gross income for the
year is $73,000.
b.
David and Donna are married and file a joint return. Each is covered by an employee-
sponsored pension plan, and their adjusted gross income is $103,000. Determine their
maximum IRA contribution and deduction for the current year.
c.
Pedro and Roxanne are married and have two children, ages 8 and 4. Their adjusted gross
income for the year is $196,000. What is maximum amount they can contribute to each child’s
Coverdell Education Savings Account (CESA) for the year?
Assuming Marissa did not make any contributions to other IRA accounts during the year, she is
141. For each of the following situations, determine whether the item is deductible, how it would be deducted on the
taxpayer’s return (if there are alternatives possible, discuss the conditions that would determine the treatment) and any
limitations, which might be placed on the deduction.
a.
Tony and Rika are married and file a joint return. Only Tony is covered by an employee-
sponsored pension plan and their adjusted gross income is $183,000. Determine their
maximum IRA contribution and deduction for the current year.
b.
Elise graduated from Southern University in May of 2014 and immediately started working as
a financial analyst for Simone Financial Group. To finance her college education, she borrowed
$30,000 from a local bank. In January of 2014, she begins paying back her student loans and
pays $2,400 of interest expense during the year. Her adjusted gross income for the year is
$63,000.
c.
During the current year, Rowland accepts a job as a computer programmer with Davenport
Industries. He incurs the following expenses in moving from East Brunswick, New Jersey to
Durham, North Carolina. Davenport Industries reimburses him $4,000 for his move.
Transportation
of household
goods
$2,800
Airfare
340
Temporary
living:
Lodging
430
Meals
120
House-
hunting trip:
Transportation
330
Lodging
280
Meals
110
Chapter 6
142. Associated with
143. Business meals
144. Business gift
145. Business bad debt expense
146. Child support
147. Nonbusiness bad debt
148. Tax home
149. Travel expenses