EA2 Study Unit 4.1-4.5 Business Expenses

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Questions and Answers

All of the following statements about fringe benefits for 2023 are true EXCEPT?

Adoption expenses provided by an employer are taxable to the employee. (correct)

Employee wages do not include the value of any property or service that has so little value that accounting for it would be unreasonable or administratively impracticable.

An employer vehicle made available for personal use is included in wages.

An employer can exclude qualified transportation fringe benefits from an employee's wages even if they are provided in place of pay.

Bob works on the loading dock for the Loaden Partnership from 7:00 a.m. to 3:00 p.m., Monday - Friday. Susan, the full-time secretary, works a 4-day week. Max, the bookkeeper, is the sole proprietor of the Books-I-Keep Accounting Service and is a licensed accountant. Max works a different schedule each week for Loaden but is very conscientious and reliable. How many of these individuals are considered employees?

2 (correct)

None.

Cafeteria plans are written plans that allow employees to choose among two or more benefits consisting of?

Education expenses paid for employees are deductible as fringe benefits.

If an employer transfers a capital asset to an employee, no gain or loss is recognized by the employer or the employee.

Only those fringe benefits that are includible in an employee's wages are deductible.

cash and qualified benefits. (correct)

Karla operates a clothing store and paid $24,000 in wages to two employees ($12,000 each). She also provided for child care for their children valued at $3,600 for each employee. The employees also received clothing from the store, having a total value of $800, for working 5 extra days. How much is deductible by Karla?

32,000 (B) Signup and view all the answers

Payments made to employees are normally currently deductible as business expenses EXCEPT

Wages paid to employees for constructing a new building to be used in the business. (C) Signup and view all the answers

Which of the following fringe benefits is NOT excludable from an employee's wages for 2023?

$60,000 of group term life insurance covering the death of an employee. (C) Signup and view all the answers

Laura, a cash-basis taxpayer, leased a floor of a building for 6 years with an option to renew for an additional 4 years. She paid $3,000 to acquire the lease (one-third of which is attributable to the option) and also paid both the first and last years' rent of $8,000 per year. How much can Laura deduct for the first year?

$8,300 (A) Signup and view all the answers

An employer provides qualifying educational assistance in the amount of $6,500 to one employee. What is the correct treatment of this expense?

The employer can deduct $5,250, and the employee must report $1,250 as wages. (D) Signup and view all the answers

An employer makes contributions to a welfare benefit fund. What is the correct treatment of these contributions for the employer?

The employer can deduct the amount of contributions up to the amount of benefits paid out during the year. (A) Signup and view all the answers

An employer provides qualifying dependent care assistance to an employee. What is the maximum amount of assistance that can be excluded from the employee's wages?

$5,000 (B) Signup and view all the answers

Which of the following statements is TRUE regarding the treatment of employee benefit programs?

An employer can deduct the cost of providing group term life insurance to employees, but the employee may be required to report a portion of the premium as taxable income. (A) Signup and view all the answers

An employer provides a $1,000 gift certificate to an employee for a local grocery store. How is this gift certificate treated for tax purposes?

The employer can deduct the $1,000 gift certificate, and the employee must include the $1,000 as taxable income. (B) Signup and view all the answers

An employer provides a $500 cash bonus to an employee for exceeding sales goals. How is this cash bonus treated for tax purposes?

The employer can deduct the $500 bonus, and the employee must include the $500 as taxable income. (D) Signup and view all the answers

An employer provides a $2,000 tuition reimbursement to an employee for taking a course related to their job. How is this tuition reimbursement treated for tax purposes?

The employer can deduct up to $5,250, and the employee can exclude up to $5,250 from taxable income. (C) Signup and view all the answers

What is the maximum deductible compensation for Mickie May, assuming the Goliaths are not a publicly held company and May is not the company's CEO, CFO, or one of the next three highest-paid executives?

The fair value of his services. (B) Signup and view all the answers

Which of the following expenses can Rudy deduct as a current business expense?

Sales tax on miscellaneous office supplies (A), Property tax on the building where his business is located (D) Signup and view all the answers

How much rent expense can Jack deduct on his Year 1 income tax return?

$22,500 (B) Signup and view all the answers

Which of the following statements about real estate taxes is true?

Real estate taxes included in monthly mortgage payments and placed in escrow are deductible when the lender pays the taxing authority. (C) Signup and view all the answers

Which of the following is considered capitalized cost?

Taxes paid on the purchase of a new truck (B), Sales tax on merchandise purchased for resale (C) Signup and view all the answers

What is the primary reason why Mickie May's compensation should be based on the fair value of his services?

It ensures May's compensation is not excessive compared to other players. (D) Signup and view all the answers

Which of the following statements about deductible taxes is false?

State income taxes imposed on a partnership are not deductible. (B) Signup and view all the answers

What is the main reason why prepaid rent can be partially deducted?

It is an accounting principle that requires expenses to be matched with the revenue they generate. (D) Signup and view all the answers

Which of the following is NOT a factor in determining the deductibility of a fringe benefit?

The employee's job title (C) Signup and view all the answers

How does the IRS handle the deduction of property tax as a business expense?

They may accept a deduction for property tax even if the relationship to the business is unclear. (C) Signup and view all the answers

Which of the following statements regarding deductible taxes is false?

If the buyer agrees to pay delinquent taxes, the seller can deduct them but must also include them in the selling price on the sale of the business property. (A) Signup and view all the answers

For purposes of deducting compensation as a business expense, what is NOT a required element to be considered?

The fact that you pay your employees for legitimate business purposes is sufficient, by itself, for deducting the amounts as business expenses. (D) Signup and view all the answers

A sole proprietor who derives income from their grocery store business should deduct state income taxes on which Schedule of Form 1040?

Schedule A (B) Signup and view all the answers

Which of the following is NOT a component typically included when a taxpayer is required to account for inventories?

Donations of items to charity (B) Signup and view all the answers

Which of the following is NOT a test used to determine whether an employee's pay is deductible as an expense?

Payments for services an employee rendered are ordinary and necessary and are directly or indirectly connected with your trade or business. (A) Signup and view all the answers

When a business owner deducts state and local inheritance taxes, what is the limitation on the deduction?

There is no deduction allowed for these taxes. (B) Signup and view all the answers

Which of the following taxes is deductible as a business expense by a partnership?

State income taxes imposed on the partnership (B) Signup and view all the answers

Which of the following statements about the deductibility of compensation is false?

The fact that you pay your employees for legitimate business purposes is not sufficient, by itself, for deducting the amounts as business expenses. (C) Signup and view all the answers

Mickie May, a baseball player who is also the majority shareholder of his team, receives a salary that is twice that of the next highest-paid player in the league. During an audit, what will be the IRS's most likely treatment of his salary?

The salary will be deductible only to the extent it is reasonable for the services performed. (A) Signup and view all the answers

In determining if salaries paid to officers are reasonable, which of the following is considered?

The amount paid to each individual officer compared to the services performed by that officer. (A) Signup and view all the answers

Which of the following expenses is NOT considered a deductible tax for a business owner?

State income taxes on business income (B) Signup and view all the answers

What is considered deductible when a taxpayer is required to account for inventories?

Supplies that physically become a part of the item intended for sale. (C) Signup and view all the answers

Which of the following statements is TRUE regarding the deductibility of taxes?

The deduction for real estate taxes is limited to $10,000 per taxpayer. (D) Signup and view all the answers

Which of the following factors is NOT considered when determining if an employee's pay is a deductible business expense?

The employee's ability to perform the required tasks. (B) Signup and view all the answers

If the buyer agrees to pay delinquent taxes, the seller...

...can deduct the taxes, but must also include them in the selling price on the sale of the business property. (A) Signup and view all the answers

In the scenario concerning Ray's delivery truck and his W-2 income, what is the reason for not withholding federal income tax?

He is considered a statutory employee, and federal income tax is not withheld in such cases. (D) Signup and view all the answers

In the cost of goods sold calculation for Mr. K's widget manufacturing business, which expense is specifically excluded from the calculation?

Freight on shipments of finished goods (D) Signup and view all the answers

According to the provided information, which of the following fringe benefits is NOT excludable from wages?

Employer-provided vehicles when used by the employee for personal purposes (B) Signup and view all the answers

Which of the following statements regarding deductible taxes is INCORRECT?

Local benefit taxes for business assets are deductible, even if they increase the value of the property. (C) Signup and view all the answers

In Sluggo's slot machine manufacturing business, what is the primary reason for including indirect labor in the cost of goods sold calculation?

It is considered an overhead expense, and manufacturers must use the full absorption method of costing. (A) Signup and view all the answers

Which of the following expenses incurred by Sluggo would be considered a selling expense rather than a cost of goods sold?

Freight on shipments of finished slot machines (D) Signup and view all the answers

What is the correct formula for calculating the cost of goods sold for Mr. K's widget manufacturing business?

Beginning inventory + Purchases + Manufacturing Overhead - Ending inventory (A) Signup and view all the answers

In determining the cost of goods sold for Sluggo, which expense is directly included in the final calculation?

Indirect labor (C) Signup and view all the answers

Which of the following statements about the treatment of freight charges is true?

Freight in is always included in the cost of goods sold, while freight out is a selling expense. (A) Signup and view all the answers

Given that Mr. K's widget manufacturing business uses the full absorption method of costing, which of these expenses would be considered a period cost, not a product cost?

General and administrative costs (C) Signup and view all the answers

Which of the following fringe benefits would likely be considered a de minimis fringe benefit?

A $50 gift certificate to a local restaurant given to employees for their birthday (C) Signup and view all the answers

If Ray were to receive a W-2 with a significant amount withheld for federal income tax, what would be the most likely reason for this?

He was reclassified as a common law employee during the year. (A) Signup and view all the answers

What is the key difference between the cost of goods sold calculation for Mr. K's widget business and Sluggo's slot machine manufacturing?

There is no significant difference, as both businesses calculate cost of goods sold in the same way. (C) Signup and view all the answers

Why is the full absorption method of costing relevant for manufacturers like Mr. K and Sluggo?

It accurately reflects the true cost of producing goods, including both direct and indirect costs. (B) Signup and view all the answers

In the provided content, which type of employee is not subject to federal income tax withholding?

Statutory employee (C) Signup and view all the answers

What is the maximum amount of group term life insurance an employee can receive without paying any taxes on the premiums?

$50,000 (A) Signup and view all the answers

Which of the following benefits can be included in a cafeteria plan?

Adoption assistance (B) Signup and view all the answers

Which of the following statements accurately describes the tax treatment of vacation pay for an accrual-basis taxpayer?

Vacation pay is deductible in the year it is paid, or if vested by year-end, when paid within 2 1/2 months after the close of the tax year. (C) Signup and view all the answers

Which of the following expense is NOT deductible as a business expense?

Educational assistance expenses paid by an employer for employees exceeding $5,250. (A) Signup and view all the answers

Which of the following is NOT a factor in determining whether an individual is considered an employee for tax purposes?

The individual's employment classification under state law. (C) Signup and view all the answers

Which of the following expenses is NOT typically deductible for a cash-basis taxpayer?

Depreciation of equipment. (D) Signup and view all the answers

A cash basis taxpayer leases a piece of equipment for 5 years. The lease payments are $10,000 per year. The taxpayer makes the first payment on January 1, 2023. What is the total amount of the lease payment that the taxpayer can deduct in 2023?

$10,000 (B) Signup and view all the answers

Which of the following is a valid and acceptable benefit that can be included in a cafeteria plan?

Adoption assistance (C) Signup and view all the answers

What is the main reason that vacation pay accrued and paid in the year it is earned is deductible for an accrual-basis taxpayer?

It represents a liability incurred in the current tax year. (A) Signup and view all the answers

What is the tax treatment of meals provided to waitresses during their work hours?

Non-taxable fringe benefits (D) Signup and view all the answers

Which statement is true about the meals provided to waitresses by the restaurant owner?

They can be deducted by the owner when served during work hours. (D) Signup and view all the answers

During which circumstances can waitresses exclude meal benefits from their gross income?

Only on weekdays while at work (C) Signup and view all the answers

Study Notes

Fringe Benefits & Employee Compensation

Employer-provided vehicles for personal use are included in wages.
Qualified transportation fringe benefits are excludable from employee wages.
Adoption expenses provided by an employer are taxable to the employee, up to $15,950.
Wages do not include property of negligible value if accounting is impractical.

Worker Classification

A worker is considered an employee if the employer controls "what will be done and how it will be done."
Independent contractors, like doctors, lawyers, veterinarians, construction contractors, and others in an independent trade offering services to the public, are not considered employees.

Employee Work Schedules

Bob, a loading dock worker with a set schedule, is an employee.
Sue (secretary), with a fixed 4-day week, is an employee.
Max (bookkeeper), with a variable schedule, may or may not be an employee, depending on the degree of control the Loaden Partnership has over their work. There needs to be control over the details of how the work is performed.

Cafeteria Plans

Cafeteria plans let employees choose between cash benefits and other benefits such as qualified benefits.
Education expenses paid for employees aren't deductible as fringe benefits.
If an employer transfers a capital asset to an employee, there's no gain/loss recognized.
Only those fringe benefits includible in employee wages are deductible.

Deductible Compensation

Reasonable compensation for personal services is deductible.
Deduction is allowed for the fair market value of transferable property or property not subject to substantial forfeiture risk.
Childcare services provided by the employer is included as compensation (up to $5,000 per employee).
Wages paid to workers for a new building are capitalized.

Fringe Benefits (Excludable)

Group term life insurance (up to $50,000) is excluded in an employee's wages (cost in excess of $50,000 is includible, calculated based on uniform premiums).
Educational assistance up to $5,250.
Dependent care assistance of up to $5,000.
Adoption assistance up to $15,950 is excludable.

Payments to Employees

Payments to employees are normally currently deductible.
Wages paid for constructing a new building are not currently deductible – they are capitalized.
Payments to employee beneficiaries (decedent), if reasonable, are deductible.

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