Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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Questions and Problems 4-39
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$2,850
∗
200DB/19.2%
* See Chapter 7 for depreciation limits for automobiles. The limits do not affect this probl em.
4-40 Chapter 4
Business Income and Expenses, Part II
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LO 4.2 4. Teresa is a civil engineer who uses her automobile for business. Teresa drove her automo-
bile a total of 22,650 miles during 2010, of which 95 percent was business mileage. The
actual cost of gasoline, oil, depreciation, repairs, and insurance for the year was $8,300.
a. How much is Teresa’s transportation deduction based on the standard mileage
method?
$ ____________
b. How much is Teresa’s transportation deduction based on the actual cost method?
$ ____________
c. Which method should Teresa use to calculate her transportation deduction?
_________________________________________________ ______________________
Why?__________________________________________________________________
_________________________________________________ ______________________
LO 4.2 5. George Dick, an employee of Plum Corporation, drove his car a total of 19,595 miles
during 2010. Of the total miles, 18,674 were business miles. The total expenses of
operating his automobile for the year were as follows:
Gasoline $1,072
License fee 150
Oil 250
Insurance 970
Repairs 360
Interest on automobile loan 1,100
Parking and toll fees for business 250
George purchased his automobile on June 30, 2008, for $12,000, and depreciation
expense for 2010 (assuming 100 percent business use at 19.2% depreciation) is $2,304.
In the past, he has used the standard mileage method to calculate his deduction. Using
Form 2106 on pages 4-39 to 4-40, calculate George’s deduction for automobile expenses.
LO 4.2 6. Art is self-employed installing home entertainment systems, and he drives his car fre-
quently to installation locations. Art drove his car 15,000 miles for business purposes
and 20,000 miles in total. His actual expenses, i ncluding depreciation, for operating
the auto are $10,000 since he had to have the car repaired several times. Art has always
used the actual cost method in the past. How much is Art’s deductible auto expense for
the year?
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 4.3 7. Cindy operates a computerized engineering drawing business from her home. Cindy
maintains a home office and properly allocates the following expenses to her office:
Depreciation $1,500
Utilities 500
Real estate taxes 325
Mortgage interest (100 percent deductible) 500
a. Assum e that Cindy earns income of $2,400 from her b usiness for the ye ar before
deducting home office expenses. She has no other expenses associated with the busi-
ness. Calculate Cindy’s deduction for home office expenses.
$ ____________
Questions and Problems 4-41
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b. Assume that Cindy earns income of $2,600 from her business during the year before
deducting home office expenses. Calculate Cindy’s deduction for home office
expenses.
$ ____________
LO 4.3 8. Pete qualifies for a home office deduction. The amount of space devoted to business
use is 300 square feet of the total 1,200 square feet in his apartment. Pete’s total
rent for the year is $9,6 00, and he pays utilities (other than telephone) of $2,500 for
the year. Calculate Pete’s deduction for home office expenses before the gross income
limitation.
Rent $ ____________
Utilities other than telephone ____________
Total home office expenses $
____________
LO 4.3 9. Ann is a self -employed restaurant critic who does her work exclusively from a home
office. Ann’s income is $25,000 before the home office deduction this year. Her office
takes up 200 square feet of her 1,000-square-foot apartment. The total expenses for
her apartment are $6,000 for rent, $1,000 for u tilities, $200 for renter’s insurance,
and $800 for pest control and other maintenance. What is Ann’s home office ded uc-
tion? Please show your calculations.
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 4.4 10. Grace is a self-employed sales consultant who spends significant time entertaining
potential customers. She k eeps all the appropriate records to substantiate her enter-
tainment. She has the following expenses in the current year:
Restaurant meals $5,000
Greens fees (all business) 500
Tickets to baseball games 500
Country Club dues (all business use) 6,000
What is the tax-deductible entertainment expense Grace may claim in the current
year? On which tax form should she claim the deducti on?
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 4.4 11. Marty is an employee of Apricot, Inc. Marty incurs the following expenses related to
entertainment of his clients in 2010:
Dues to a country club $4,500
(The country club was used for business
25 days of the total 75 days that it was used.)
Business meals at the country club 850
Dues to a tennis club 1,000
(The club was used 75 percent for directly
related business.)
Tennis fees (personal use) 260
Business meals at various restaurants 2,250
4-42 Chapter 4
Business Income and Expenses, Part II
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
a. How much is Marty’s deduction for entertainment expenses for 2010 (before the
2 percent of adjusted gross income limitation)?
$ ____________
b. For each item listed on the previous page that you believe is not allowed as a deduc-
tion, explain the reason it is not allowed.
_________________________________________________ ______________________
_________________________________________________ ______________________
_________________________________________________ ______________________
_________________________________________________ ______________________
LO 4.4 12. a. Loren is a secretary in a la wyer’s office. Since he often deals with legal matters,
Loren feels that a law degree will be beneficial to him. May Loren deduct his educa-
tional expenses for law school as a miscellaneous itemized deduction?
______________
Explain _______________________________________________________________
_________________________________________________ ______________________
b. Alicia is an international salesperson who wishes to learn Spanish to improve her
ability to communicate with foreign clients. May Alicia deduct her educational
expenses for language school as a miscellaneous itemized deduction?
______________
Explain _______________________________________________________________
_________________________________________________ ______________________
c. Joan is a practicing lawyer. She enrolls in a local medical school and works toward a
medical degree in her spare time. May Joan deduct her educational expenses for the
medical classes as a miscellaneous itemized deduction?
______________
Explain _______________________________________________________________
_________________________________________________ ______________________
LO 4.4 13. Bob is a self-employed lawyer and is required to take a week of continuing legal edu-
cation every year to keep his license. This year he paid $1,000 in course fees for his
continuing legal education in a d ifferent city. He also p aid $500 for airfare and a
hotel room and paid $260 for meals. What is the total amount he can deduct on his
Schedule C related to these expenses?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 4.4 14. Carey opens a law office in Chicago on January 1, 2010. On July 1, 2010, Carey pur-
chases a law library from a retiring lawyer for $10,500. The library has an estimated use-
ful life of 7 years. Depreciation on the library is $750 for Carey in 2010. On January 1,
2010, Carey purchases an annual subscription to a law journal for $170 and a 1-year legal
reference service for $1,500. Calculate Carey’s deduction for the above items for the
2010 tax year.
$ ____________
LO 4.4 15. Cooper and Brandy are married and file a joint income tax return. Cooper is a police-
man who spent $400 on uniforms during the year. His laundry expenses for the uni-
forms were $75 for this year, plus $65 for altering them. Brandy works as a drill
Questions and Problems 4-43
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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press operator and is required by her employer to wear jeans and a work shirt on the
job, which cost $175 this year. Her la undry costs were $50 for the work clothes.
Brandy is also required to wear safety glasses and safety shoes w hen working, which
cost a total of $95. How much is their total deduction on Schedule A for special cloth-
ing and uniforms (before limitations)?
$ ____________
LO 4.4 16. Josh is a judge employed by the county. He must purchase and maintain his judicial
robes. The total cost of purchasing a new robe and dry cleaning for the current year
is $750. How much may he deduct on his tax return? Why? Where does he deduct
this on his tax return?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 4.4 17. Sam owns an insurance agency and makes the following business gifts during the year.
Calculate Sam’s deducti on for business gifts.
Donee Amount
Amount
Allowed
Ms. Sears (a client) $35, plus $4 shipping ___________
Mr. Williams (a tennis partner,
not a business prospect or client)
55 ___________
Mr. Sample (a client) 22 ___________
Mrs. Sample (nonclient wife
of Mr. Sample)
20 ___________
Various customers (calendars
costing $3 each with the company
name on them)
300 ___________
Mr. Shiver (an employee gift,
a watch, for 25 years of continuous service)
175 ___________
Total busi ness gift deduction $
__________
LO 4.5 18. Scott Butterfield is self-employed as a CPA. He uses the cash method of accounting,
and his Social Security number is 644-47-7833. His principal business code is 541211.
Scott’s CPA practice is located at 678 Peso Dr., La Mesa, CA 92041. During 2010,
Scott had the following income and expenses:
Fees from CPA practice $128,250
Expenses:
Car mileage (3,586 business miles) 1,793
Business insurance 870
Office expense 3,450
Rent on office space 8,400
City business license 150
Travel expense 4,100
Meals and entertainment 4,780
Utilities 1,625
Wages of secretary 25,700
4-44 Chapter 4
Business Income and Expenses, Part II
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Questions and Problems 4-45
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
4-46 Chapter 4
Business Income and Expenses, Part II
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Scott placed his car in service on January 1, 2008. This year, he commuted 2,000 miles
in it and drove it 4,000 miles for nonbusiness purposes. His wife has a car for personal use.
Complete Schedule C on pages 4-45 and 4-46 for Scott showing Scott’s net income
from self-employment.
LO 4.5 19. Go to the IRS Web site (www.irs.gov) and redo Problem 18 (Chapter 4, Group 2) using
the most recent interactive ‘‘Fill-in Forms’’ Schedule C (Form 1040) on the IRS Web
site. Print out the completed Schedule C.
LO 4.2 20. Martha is a self-employed tax accountant who drives her car to visit clients on a regular
basis. She drives her car 4,000 miles for business and 10,000 for commuting and other
personal use. Assuming Martha uses the standard mileage method, how much is
her auto expense for the year? Where in her tax return should Martha claim this
deduction? ____________________________________________________________
_______________________________________________________________________
_________________________________________________________________________
LO 4.5 21. Margaret started her own business in the current year and will report a profit for her
first year. Her results of operations are as follows:
Gross income $50,000
Travel 1,000
Transportation
6,790 miles, using standard mileage method
Entertainment in total 4,000
Seven gifts at $50 each 350
Rent and utilities for apartment in total
(20% is used for a home office)
10,000
What is the net income Margaret should show on her Schedule C? Show the cal-
culation of her taxable business income.
Gross income _______
Expenses (describe each) _______
_______
_______
_______
_______
_______
Taxable Business Income
_______
LO 4.6 22. In June of 2010, Keith accepts a new job with the same employer in San Diego. He
formerly commuted 12 miles to a job in Canton, OH; San Diego is 2,150 miles
from his old home. He incurs the following expenses in his move from Ohio in 2010:
Moving and packing charges $5,100
Transportation during the move 900
Lodging during the move 600
Meals during the move
300
Total
$6,900
Questions and Problems 4-47
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Keith is not reimbursed for any of these expenses by his employer. What is the
amount of Keith’s moving expense deduction?
$ ____________
LO 4.6 23. Assume Keith’s employer reimburses him $4,200 for the move. Using the information
from Proble m 22, calculate Keith’s moving expense s deduction using Form 3903 on
page 4-49.
LO 4.6 24. Go to the IRS Web site (www.irs.gov) and redo Problem 23 using the most recent
interactive ‘‘Fill-in Forms’’ Form 3903, Moving Expenses. Print out the completed
Form 3903.
LO 4.6 25. Sherry moved to Chicago in the current year to take a new job after being laid off from
her job in San Diego. She incurred $5,000 of costs movi ng her household goods, $300
for a one-way airplane ticket to Chicago, $800 for her first month’s rent, and $500 for
restaurant meals while looking for the apartment and staying with a friend. How much
can Sherry claim as a moving expense?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 4.7 26. Lew is a practicing CPA who decides to raise bonsai as a business. Lew engages in the
activity and has the following revenue and expenses:
Sales $ 5,000
Depreciation on greenhouse 10,000
Fertilizer, soil, pots 1,500
a. What are the factors that the IRS will consider when evaluating whether the activity
is a hobby?
____________________________________________________________________
__________________ ________ ____ _______ ________ _______ ________ _______ __
_________________________________________________ ______________________
b. If the activity is deemed to be a regular business, what is the amount of Lew’s loss
from the activity?
$ ____________
c. If the activity is deemed to be a hobby, what is the amount of Lew’s expenses (if any)
from the activity that may be deducted?
$ ____________
GROUP 3:
COMPREHENSIVE PROBLEMS
.............................................. .............................................. .
1. Ken (age 31) and Amy (age 28) Booth have brought you the following information
regarding their income, expenses, and withholding for the year. They are unsure
which of these items must be used to calculate taxable income.
Income:
Ken’s salary (salesman) $27,200
Amy’s wages (office clerk) 18,200
4-48 Chapter 4
Business Income and Expenses, Part II
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.