Sam owns a small house that he rents out to students attending the local university. Are the expenses associated with the rental unit deductions for or from AGI?

For AGI, because the net rental in come is added to the AGI, and the full amount of the expense related to the rental unit

Jenny is self-employed as a tax accountant and reports income and deductions on Schedule C. She meets regularly with clients over lunch to discuss their tax returns and Jenny pays for the meals. In March, she spent $200 on various lunches. Can she deduct the cost of the meals?

Yes, the full $200 is a business deduction (a for AGI deduction).

Yes, but only $100 is a business deduction (a for AGI deduction).

Yes, but only $100 is a miscellaneous itemized deduction (a from AGI deduction).

No, none of the expense is deductible.

Because expenses incurred both in a business and for the production of investment income are deductible, why is it important to determine in which category a particular activity falls?

Different tax consequences may result depending on the type of activity. For example, deductions incurred in a business are generally from AGI whereas investment expenses generally are for AGI deductions subject to various limitations. Losses incurred on business property generally are capital losses, whereas losses on investment property generally are ordinary.

Different tax consequences may result depending on the type of activity. For example, deductions incurred in a business are generally for AGI whereas investment expenses generally are from AGI deductions subject to various limitations. Losses incurred on business property are ordinary, whereas losses on investment property generally are capital losses and are subject to limitation.

The tax rate differs depending on the type of activity. Investment income is subject to an additional 5% tax rate.

The deductions incurred in a business are subject to a floor. Business expenses can only be deducted to the extent the total of the business expenses for the year exceeds 1% of the individual's AGI. Investment expenses are not subject to a floor.

In order for a business expense to be deductible it must be ordinary, necessary, and reasonable. Explain what these terms mean.

Select from the explanations below:

Explanation
Ordinary
Necessary
Reasonable

a.	An expense that is defined as appropriate or helpful; however, it need not be indispensable. The test here is whether a reasonable business person would have incurred the same expenditure.
b.	An expense that provides a permanent improvement or "betterment" that increases the value of any property.
c.	An expense that is reasonable in amount and that bears a reasonable and proximate relationship to the income-producing activity or property. It must be customary or usual to the particular activity.
d.	An expense that is allocated or related to tax-exempt income.
e.	An expense that is reasonable in amount. It must not be excessive or unusual when compared to similar expenses made by similar businesses.

Michelle pays a CPA $400 for the preparation of her federal income tax return. Michelle's only sources of income are her salary from employment and interest and dividends from her investments.

Is this a deductible expense? If so, is it a deduction for or from AGI?

The entire $400 is deductible because it is incurred in the determination of a tax. However, all $400 is a business deduction (a for AGI deduction). Business deductions are only deductible to the extent they exceed 2% of AGI, and then only if the taxpayer itemizes deductions rather than taking the standard deduction.

The expense is not deductible because it is a business expense and Michelle does not have business income, she is an employee.

The entire $400 is deductible because it is incurred in the determination of a tax. However, all $400 is a miscellaneous itemized deduction (a from AGI deduction). Miscellaneous itemized deductions are only deductible to the extent they exceed 2% of AGI, and then only if the taxpayer itemizes deductions rather than taking the standard deduction.

Assume the same facts #7 except that in addition to her salary and investment and dividend income, Michelle also owns a small business. Of the $400 fee paid to the CPA, $250 is for the preparation of her Schedule C (Profit or Loss from Business). How much, if any, of the $400 is a deductible expense? Identify it as either for or from AGI.

The entire $400 is deductible because it is a business expense. Business expense is a for AGI deduction and the deduction is limited to the amount of revenue earned from the business.

The entire $400 is deductible because it is a business expense. Business expense is a from AGI deduction and the deduction is limited to the amount of revenue earned from the business.

Because $250 of the fee is attributable to Michelle's business, this amount is a from AGI deduction. The remaining $150 is not deductible because the expense is not attributable to Michelle's business.

Because $250 of the fee is attributable to Michelle's business, this amount is a for AGI deduction. The remaining $150 is a miscellaneous itemized deduction. Miscellaneous itemized deductions are only deductible to the extent they exceed 2% of AGI, and then only if the taxpayer itemizes deductions rather than taking the standard deduction.

Otter Corporation sends people to the state capital to lobby the legislature to build a proposed highway that is planned to run through the area where its business is located.

If Otter Corp. incurs $3,200 of expenses, what part, if any, of its expenses are deductible?

These are considered in-house expenditures and they are deductible up a maximum of $2,000 per year.

The expenses are not deductible because although Otter Corporation's lobbying expenses relate to its business, they are not incurred in an attempt to influence local legislation.

The full amount is deductible because Otter Corporation's lobbying expenses relate to its business and they are incurred in an attempt to influence state legislation on a legislation that is a direct interest to the company's business.

The full amount is deductible because the IRC does not specifically disallow for lobbying expenses. Thus, the expenses are deductible under the IRC's general framework.

Would it make a difference if the proposed road were a city road rather than a state highway, and Otter lobbied its local government?

Yes, but the expenses are only deductible up to a maximum of $1,500.

Yes, but only 75% of the expenses are deductible.

Yes. Now since the lobbying expenses relate to its business and are incurred in an attempt to influence local legislation, they are deductible.

No, the tax treatment is the same as in #9.

Edward's, Inc., incurred the following expenses in investigating the feasibility of opening a new restaurant in town:

Expenses to do a market survey	$3,400
Expenses to identify potential
suppliers of goods	$8,100
Expenses to identify a proper
location	$1,600

Edwards, Inc., already owns another restaurant in town and is wanting to expand. Edward's, Inc. opens the new restaurant in April of the current year. Under this scenario Edwards may deduct:

$0

$13,100

$5,000

$5,405

Same as #11, except Edwards decides against opening a restaurant after getting back the results of the investigation.

$0

$13,100

$5,000

$5,405

Assume that Edward's, Inc. is in the book selling business and feels that its bookstore business is not making a high enough return and it wants to move into the restaurant business. It opens the restaurant in April of the current year. Under this scenario Edwards may deduct:

$0

$13,100

$5,000

$5,405

Same as #13 except Edward's decides against opening a restaurant after getting back the results of the investigation.

$0

$13,100

$5,000

$5,405

Maya is a self-employed event planner. While driving to work at a major event that she planned, Maya is pulled over for speeding by the local police. She paid a fine of $300. How much Maya can deduct as a business expense?

$0, the expense is non-deductible

$150 for AGI

$300 for AGI

$300 from AGI

Troy incurs the following expenses in his business, an illegal gambling establishment:

Salaries to employees	$200,000
Insurance expense	60,000
Utilities expense	70,000
Bribes to police	50,000

His deductible expenses are

A. $0.

B. $200,000.

C. $330,000.

D. $380,000.

17. Pat, an insurance executive, contributed $1,000,000 to the re-election campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct?

A. $0

B. $100,000

C. $500,000

D. $1,000,000