South-Western Federal Taxation 2021 Chapter 9 Homework PDF

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Homework and Additional Practice Solutions/Explanations for South-Western Federal Taxation 2021...

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Chapter 9 Homework 

1. Mason performs services for Isabella. Based on the factors listed below, select "Employee" or "Independent contractor" to classify Mason's likely employment status. o 1a. Mason performs services only for Isabella and does not work for anyone else.  Employee o 1b. Mason sets his own work schedule.  Independent contractor o 1c. Mason reports his job-related expenses on a Schedule C.  Independent contractor o 1d. Mason obtained his job skills from Isabella's training program.  Employee o 1e. Mason performs the services at Isabella's business location.  Employee o 1f. Mason is paid based on time worked rather than on task performed.  Employee

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2. In 2018, Emma purchased an automobile, which she uses for both business and personal purposes. Although Emma does not keep records of her operating expenses (e.g., gas, oil, repairs), she can prove the percentage of business use and the miles driven each year. In March 2020, Emma seeks your advice as to what income tax benefit, if any, she can derive from the use of her automobile. What would you suggest? Complete the statement below by selecting the correct response from the dropdown lists.

o It appears that Emma has never claimed a deduction for the business use of the auto. Due to an absence of records pertaining to the cost of operating the vehicle, Emma cannot use the actual cost methods of determining the deduction. Therefore, Emma should use the automatic mileage method. 

3. Jamie has an undergraduate degree in finance and is employed full-time by a bank. She is taking courses at a local university leading to an MBA degree. o 3a. Jamie wants to know if the full cost of this education deductible. Based on the reasons for the taking courses listed below, identify for Jamie whether the associated costs are "Deductible" or "Nondeductible".  It is to maintain or improve existing skills required in her present job.  Deductible  It is to meet the minimum educational standards for qualification in her existing job.  Nondeductible  It is to qualify her for a new trade or business.  Nondeductible  It is to meet the express requirements of her employer or the requirements imposed by law to retain her employment status.  Deductible o 3b. What limitations are imposed on the deduction?  Only the expenses under § 222 are deductible for AGI.

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4. Fred, a self-employed taxpayer, travels from Denver to Miami primarily on business. He spends five days conducting business and two days sightseeing. His expenses are $400 (airfare), $150 per day (meals), and $300 per night (lodging). Fred's deductible expenses are: o Airfare: $400

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o Lodging: $1,500  300 x 5 = 1,500 o Meals: $375  150 x 5 x .5 = 375 

5. Brenda, a self-employed taxpayer, travels from Chicago to Barcelona (Spain) on business. She is gone 10 days (including 2 days of travel) during which time she spends 5 days conducting business and 3 days sightseeing. Her expenses are $1,500 (airfare), $200 per day (meals), and $400 per night (lodging). Because Brenda stayed with relatives while sightseeing, she only paid for 5 nights of lodging. Compute Brenda's deductions for the following expenses. o 5a. Deduction for airfare: $1,050  (7/10) x 1,500 = 1,050 o 5b. Deduction for meals: $700  200 x 7 x .5 = 700 o 5c. Deduction for lodging: $2,000  400 x 5 = 2,000

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6. Samantha, who is single and has MAGI of $28,000, was recently employed by an accounting firm. During the year, she spends $2,500 for a CPA exam review course and begins working on a law degree in night school. Her law school expenses were $4,200 for tuition and $450 for books (which are not a requirement for enrollment in the course). o 6a. Assuming no reimbursement, how much can Samantha deduct for the CPA exam review course?  $0 o 6b. Assuming no reimbursement, how much can Samantha deduct for the Law school expenses?  $4,000

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7. Cindy, who is self-employed, maintains an office in her home that comprises 8% (200 square feet) of total floor space. Gross income for her business is $42,000, and her residence expenses are as follows:

Real property taxes $2,400 Interest on mortgage $4,000 Operating expenses $2,200 Depreciation (based on 8% business $450 use) o 7a. What is Cindy's office in the home deduction based on the Regular Method?  $1,138  (2,400 + 4,000 + 2,200) x .08 = 688 + 450 = 1,138 o 7b. What is Cindy's office in the home deduction based on the Simplified Method?  $1,000  200 x 5 = 1,000 

8. Monica, a self-employed taxpayer, travels from her office in Boston to Lisbon, Portugal, on business. Her absence of 13 days was spent as follows: Thursday Friday Saturday and Sunday Monday through Friday Saturday and Sunday Monday Tuesday

Depart for and arrive in Lisbon Business transacted Vacationing Business transacted Vacationing Business transacted Depart Lisbon and return to office in Boston o 8a. For tax purposes, how many days has Monica spent on business?  13 days o 8b. What difference does it make?  If Monica’s trip satisfies the seven-days test or the less-than25% test, then her transportation costs do not have to be allocated between business and personal. o 8c. Could Monica have spent more time than she did vacationing on the trip without loss of existing tax benefits?

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 Monica cannot satisfy the seven-days test. Under the lessthan-25% test, she could have vacationed for 3 more days assuming that the days did not interfere with the preceding and succeeding days provision. 

9. Amber's employer, Lavender, Inc., has a § 401(k) plan that permits salary deferral elections by its employees. Amber's salary is $99,000, and her marginal tax rate is 24% and she is 42 years old. o 9a. What is the maximum amount Amber can elect for salary deferral treatment for 2020?  $19,500 o 9b. If Amber elects salary deferral treatment for the above amount, how much can she save in taxes?  Her tax liability for 2020 would be reduced by $4,680.  19,500 x .24 = 4,680 o 9c. What is the recommended amount that Amber should elect as salary deferral treatment for 2020?  $19,500

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10. Jimmy establishes a Roth IRA at age 47 and contributes a total of $89,600 over 18 years. The account is now worth $112,000. Assume that Jimmy meets the income limitation at the time of the contributions. How much of these funds may Jimmy withdraw tax-free? o $112,000

Additional Practice 

1. In connection with the office in the home deduction, complete each section below: o 1a. For the office in the home deduction, complete the following sentence regarding the exclusive use requirement.  A taxpayer is allowed a deduction for office in the home expenses if a portion of the residence is used exclusively on a regular basis as a place of business used by the taxpayer’s

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clients, patients, or customers or the principal place of business of the taxpayer. o 1b. Read each statement below regarding the office in the home deduction.  1. Direct expenses benefit only the business part of the home and may be deducted in full, while indirect expenses are for maintaining and operating the home and must be allocated between business and personal use.  2. Direct expenses benefit only the business and indirect expenses are for maintaining and operating the home. Both may be deducted in full if there is an office in the home.  3. Direct expenses benefit only the business part of the home and indirect expenses are for maintaining and operating the home. Both are totaled and allocated based on square footage if there is an office in the home.  Select from the dropdown list the statement that accurately outlines the deductibility of direct and indirect expenses. o Statement 1 o 1c. Complete the statement regarding the effect a taxpayer's work status (i.e., employed or self-employed) has on the office in the home deduction.  Self-employed taxpayers classify the deduction as for AGI and as an unreimbursed employee business expense, an employee gets no deduction for 2018 through 2025. o 1d. True/False: The office in the home deduction is not available to taxpayers who do not own their home (e.g., who live in rented apartments).  False o 1e. What is the treatment of office furnishings (e.g. desk, chairs, and file cabinets) on the office in the home deduction?

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 They are handled separately and are either expenses under § 179 or depreciated. o 1f. Regarding the office in the home deduction, what is the treatment of expenses that exceed gross income from the business?  They are carried to the next year. 

2. Joey, age 49, who is single, is not covered by another qualified plan and earns $126,000 (AGI is $126,000) in 2020. How much can he contribute to a traditional IRA or to a Roth IRA in 2020? o In 2020, he can contribute $6,000 to a traditional IRA or $5,200 to a Roth IRA.  6,000  6,000 – [6,000 x (126,000 – 124,000) ÷ 15,000] = 5,200

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3. In 2020, the CEO of Crimson, Inc., entertains 7 clients at a skybox in Memorial Stadium for a single athletic event during the year. Substantive business discussions occurred at various times during the event. The box cost $2,000 per event and seats 10 people. (The cost of a regular, nonluxury box seat at Memorial ranges from $55 to $100.) Refreshments served during the event cost $700 (and were separately itemized on the bill Crimson received). How much of these costs may Crimson deduct? o $350  700 x .5 = 350

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4. Jackson, a self-employed taxpayer, uses his automobile 90% for business and during 2020 drove a total of 14,000 business miles. Information regarding his car expenses is listed below. Business parking Auto insurance Auto club dues (includes towing service) Toll road charges (business-related) Oil changes and engine tune-ups Repairs Depreciation allowable

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$140 $1,300 $180 $200 $210 $160 $2,850

Fines for traffic violations (incurred $320 during business use) Gasoline purchases $2,800 What is Jackson's deduction in 2020 for the use of his car if he uses: o 4a. The actual cost method?  $7,090  (1,300 + 180 + 210 + 160 + 2,850 + 2,800) x .9 = 6,750 + 140 + 200 = 7,090 o 4b. The automatic mileage method?  $8,390  14,000 x .575 = 8,050 + 140 + 200 = 8,390 o 4c. What records must Jackson maintain?  Keeping a written or electronic log of miles driven, the dates the automobile was used, the location of travel, and the business purpose is enough evidence for the standard rate method. If the actual expense method is used, keeping copies of receipts, canceled checks, and bills in addition to a mileage log is sufficient. Records and logs should be kept contemporaneously (e.g., updated weekly or daily). 

5. Kim works for a clothing manufacturer as a dress designer. During 2020, she travels to New York City to attend five days of fashion shows and then spends three days sightseeing. Her expenses are as follows: Airfare $1,500 Lodging (8 nights) $1,920 Meals $1,440 Airport transportation $120 Assume lodging/meals are the same amount for the business and personal portion of the trip ($240 per day for lodging and $180 per day for meals). o 5a. Determine Kim's business expenses, presuming no reimbursement.  Airfare: $1,500  Lodging: $1,200

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 (1,920/8) x 5 = 1,200  Meals: $450  (1,440/8) x 5 x .5 = 450  Transportation: $120  Total: $3,270  1,500 + 1,200 + 450 + 120 = 3,270  What amount may she deduct on her tax return?: $0 o 5b. Would the tax treatment of Kim's deduction differ if she was an independent contractor?  The deductible expenses on her tax return would be $3,270 and the expenses would be classified as a deduction for AGI. 

6. Elijah, who is single, is employed as a full-time high school teacher. The school district where he works recently instituted a policy requiring all of its teachers to start working on a master's degree. Pursuant to this new rule, Elijah spent most of the summer of 2020 taking graduate courses at an out-oftown university. His MAGI is $64,000 and expenses are as follows: Tuition $6,600 Books and course materials $1,500 Lodging $1,700 Meals $2,200 Laundry and dry cleaning $200 Campus parking $300 In addition, Elijah drove his personal automobile 2,200 miles in connection with the education. He uses the automatic mileage method. o 6a. Which of these expenses, if any, might qualify as deductions for AGI? Select "Yes" or "No" whichever is applicable. Tuition (subject to limitation) Lodging Auto mileage Campus parking Books and course materials Laundry and dry cleaning

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Yes No No No No No

Meals (subject to 50% limit) No  How much, if any, of these expenses might qualify as deductions for AGI?  $4,000 o 6b. How much of these expenses qualify as deductions from AGI? (Assume the amount from Part a is claimed.)  $0 

7. In each of the following independent situations, determine how much, if any, qualifies as a deduction for AGI under § 222 (qualified tuition and related expenses). o 7a. Lily is single and is employed as an architect. During 2020, she spends $4,100 in tuition to attend law school at night. Her modified AGI (MAGI) is $64,000. How much is her deduction for AGI under § 222 (qualified tuition and related expenses)?  $4,000 o 7b. Liam is single and is employed as a pharmacist. During 2020, he spends $2,400 ($2,100 for tuition and $300 for books) to take a course in herbal supplements at a local university. His MAGI is $81,000. How much is his deduction for AGI under § 222 (qualified tuition and related expenses)?  $0

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8. Carri and Dane, ages 34 and 32, respectively, have been married for 11 years, and both are active participants in employer qualified retirement plans. Their total AGI in 2020 is $199,000, and they earn salaries of $87,000 and $95,000, respectively. o 8a. The amount each can contribute to a regular IRA.  $6,000 o 8b. The amount each can deduct for regular IRA contributions.  $0 o 8c. The amount each can contribute to a Roth IRA.  $4,200

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 6,000 – [6,000 x (199,000 – 196,000) ÷ 10,000] = 4,200 o 8d. The amount each can deduct for Roth IRA contributions.

 $0

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