Federal Taxation 1 Exam 3 Questions &
Answers 100% Correct!!
What documentation is required in order for a travel or entertainment expense to be
deductible? - ANSWERSAll of the above.
Why is it important to distinguish whether an individual is an employee or an
independent contractor (self-employed)? - ANSWERSAll of the above
Discuss the essential differences between a traditional IRA and a Roth IRA. -
ANSWERSThe essential differences between a traditional IRA and a Roth IRA are, first,
amounts contributed to a traditional IRA are tax-deductible in the current year whereas
amounts contributed to a Roth IRA are not tax-deductible. However, upon withdrawal of
amounts from the IRA at retirement, the withdrawn amounts are fully taxable from a
traditional IRA but not taxable from a Roth IRA. Second, Roth IRAs are available to
many more taxpayers as the AGI limits are much higher for Roth IRAs than for
traditional IRAs.
The wash sale rules disallow a loss in the year of sale when substantially identical stock
or securities are acquired by the taxpayer within a 61-day period. What types of stock or
securities are considered substantially identical? - ANSWERSBonds of the same
corporation that have maturity dates within a few months of each other have been held
to be substantially identical.
If an activity does not generate a profit in three out of five consecutive years, is it
automatically deemed to be a hobby? Why or why not? - ANSWERSNo, it is not
automatically deemed a hobby. The other factors mentioned in the regulations can be
relied upon to determine that the activity is, in fact, a business. The burden to prove it is
not a hobby is generally on the taxpayer. However, meeting the three out of five year
test shifts the burden of proof to the IRS.
Understand section 280A involving personal use of vacation homes. -
ANSWERS•Property = "residence" if taxpayer's personal use exceeds the greater of the
following:
1. 14 days; or
2. 10% of the # of days property is rented at FMV.
•If personal residence (vs. rental unit), then amount of deductions may be restricted
under § 280A.
Be able to provide a taxpayer advice on which IRA options he or she may have in a
given situation. - ANSWERSChapter 7 slide 37 chart
, Austin Corporation is proposing the establishment of a pension plan that will cover only
employees with salaries in excess of $150,000. No other employees are covered under
comparable qualified plans. What problems (if any) do you envision regarding the plan's
qualifications with the IRS. - ANSWERSThe plan is discriminatory because it favors
highly-compensated employees. As a result the plan should be considered to be a non-
qualified plan by the IRS. The employer should not be able to receive the immediate tax
deduction for pension contributions. Under a non-qualified plan the employer's
deduction is generally deferred until the employee recognizes income from the plan.
Why is the distinction between deductions for AGI and from AGI important for
individuals? - ANSWERSDeductions for AGI reduce the taxpayer's taxable income by
the full amount of the deduction even if the standard deduction is used. Deductions from
AGI are not beneficial unless their sum exceeds the standard deduction, in which case
these deductions will be included as itemized deductions. Also, some deductions from
AGI are decreased by a percentage of AGI.
Are deductions allowed for entertainment expenses in 2019? - ANSWERSFor tax years
2018-2025, entertainment expenses are not deductible.
Understand the limitations in deductions "from AGI". - ANSWERS•Certain expenditures
must exceed a threshold before the excess can be deducted.
-Medical expenses.
-Casualty losses.
•Certain deductions may have other limitations:
-Charitable contributions.
Understand when an employee may deduct business expenses "for AGI" -
ANSWERSBusiness or Investment Activity
->
Ordinary Expense
->
Necessary Expense
->
Reasonable Expense
->
Documented
->
Incurred by Taxpayer
Understand the rules around deducting automobile expenses. - ANSWERS•Actual
-Depreciation
-Gas & Oil
-Repairs & Maintenance
-Insurance
License Fees
Answers 100% Correct!!
What documentation is required in order for a travel or entertainment expense to be
deductible? - ANSWERSAll of the above.
Why is it important to distinguish whether an individual is an employee or an
independent contractor (self-employed)? - ANSWERSAll of the above
Discuss the essential differences between a traditional IRA and a Roth IRA. -
ANSWERSThe essential differences between a traditional IRA and a Roth IRA are, first,
amounts contributed to a traditional IRA are tax-deductible in the current year whereas
amounts contributed to a Roth IRA are not tax-deductible. However, upon withdrawal of
amounts from the IRA at retirement, the withdrawn amounts are fully taxable from a
traditional IRA but not taxable from a Roth IRA. Second, Roth IRAs are available to
many more taxpayers as the AGI limits are much higher for Roth IRAs than for
traditional IRAs.
The wash sale rules disallow a loss in the year of sale when substantially identical stock
or securities are acquired by the taxpayer within a 61-day period. What types of stock or
securities are considered substantially identical? - ANSWERSBonds of the same
corporation that have maturity dates within a few months of each other have been held
to be substantially identical.
If an activity does not generate a profit in three out of five consecutive years, is it
automatically deemed to be a hobby? Why or why not? - ANSWERSNo, it is not
automatically deemed a hobby. The other factors mentioned in the regulations can be
relied upon to determine that the activity is, in fact, a business. The burden to prove it is
not a hobby is generally on the taxpayer. However, meeting the three out of five year
test shifts the burden of proof to the IRS.
Understand section 280A involving personal use of vacation homes. -
ANSWERS•Property = "residence" if taxpayer's personal use exceeds the greater of the
following:
1. 14 days; or
2. 10% of the # of days property is rented at FMV.
•If personal residence (vs. rental unit), then amount of deductions may be restricted
under § 280A.
Be able to provide a taxpayer advice on which IRA options he or she may have in a
given situation. - ANSWERSChapter 7 slide 37 chart
, Austin Corporation is proposing the establishment of a pension plan that will cover only
employees with salaries in excess of $150,000. No other employees are covered under
comparable qualified plans. What problems (if any) do you envision regarding the plan's
qualifications with the IRS. - ANSWERSThe plan is discriminatory because it favors
highly-compensated employees. As a result the plan should be considered to be a non-
qualified plan by the IRS. The employer should not be able to receive the immediate tax
deduction for pension contributions. Under a non-qualified plan the employer's
deduction is generally deferred until the employee recognizes income from the plan.
Why is the distinction between deductions for AGI and from AGI important for
individuals? - ANSWERSDeductions for AGI reduce the taxpayer's taxable income by
the full amount of the deduction even if the standard deduction is used. Deductions from
AGI are not beneficial unless their sum exceeds the standard deduction, in which case
these deductions will be included as itemized deductions. Also, some deductions from
AGI are decreased by a percentage of AGI.
Are deductions allowed for entertainment expenses in 2019? - ANSWERSFor tax years
2018-2025, entertainment expenses are not deductible.
Understand the limitations in deductions "from AGI". - ANSWERS•Certain expenditures
must exceed a threshold before the excess can be deducted.
-Medical expenses.
-Casualty losses.
•Certain deductions may have other limitations:
-Charitable contributions.
Understand when an employee may deduct business expenses "for AGI" -
ANSWERSBusiness or Investment Activity
->
Ordinary Expense
->
Necessary Expense
->
Reasonable Expense
->
Documented
->
Incurred by Taxpayer
Understand the rules around deducting automobile expenses. - ANSWERS•Actual
-Depreciation
-Gas & Oil
-Repairs & Maintenance
-Insurance
License Fees
