EA2 Study Unit 5.2 Travel Expenses & Study Unit 5.4 Bad Debts + BONUS
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Questions and Answers

What type of loss is a business bad debt treated as?

  • Long-term capital loss
  • Short-term capital loss
  • Capital loss
  • Ordinary loss (correct)

    • When can a taxpayer deduct a nonbusiness bad debt?

  • When the debt becomes wholly worthless. (correct)
  • When the debt is incurred.
  • When the debt becomes partially worthless.
  • When the debt is written off.

    • What happens to a bad debt that was written off in a previous year but recovered in the current year?

  • It is not reported.
  • It is reported as other income. (correct)
  • It is deducted as a capital loss.
  • It is deducted as an ordinary loss.

    • What is the primary method used to deduct bad debts for tax purposes?

    <p>Specific write-off method (D)</p> Signup and view all the answers

    Can a taxpayer deduct a loan made to a corporation if it is considered a contribution to capital?

    <p>No, it is not deductible. (A)</p> Signup and view all the answers

    Can a taxpayer take a bad debt deduction for amounts owed that were never included in gross income?

    <p>No, only if the amounts were previously included in income. (C)</p> Signup and view all the answers

    Why can't a taxpayer using the cash method of accounting claim a bad debt deduction for amounts owed that weren't received?

    <p>Because the amounts were not previously included in income. (D)</p> Signup and view all the answers

    How is a partially worthless nonbusiness bad debt treated for tax purposes?

    <p>It is not deductible. (C)</p> Signup and view all the answers

    What is the primary requirement for a bad debt deduction to be allowed?

    <p>The debt arose from a debtor-creditor relationship based on a valid and enforceable obligation. (D)</p> Signup and view all the answers

    Which of the following statements accurately describes the deductibility of a worthless debt?

    <p>A worthless debt is deductible only to the extent of the taxpayer's adjusted basis in the debt. (A)</p> Signup and view all the answers

    A cash-basis taxpayer is generally not allowed to deduct bad debts because:

    <p>They do not have a basis in accounts receivable. (D)</p> Signup and view all the answers

    What is the key factor determining whether a debt qualifies as a business bad debt?

    <p>The primary motive for incurring the debt. (D)</p> Signup and view all the answers

    A loan made to a close friend with the understanding that repayment may not occur is considered a:

    <p>Gift. (C)</p> Signup and view all the answers

    Which of the following is always considered a business bad debt?

    <p>A bad debt incurred by a corporation. (C)</p> Signup and view all the answers

    Why might a business bad debt be more advantageous than a non-business bad debt?

    <p>Business bad debts are deducted as a business expense, which may result in a lower tax liability. (D)</p> Signup and view all the answers

    What is the primary difference between a bad debt and a worthless security?

    <p>A bad debt is a loss on a loan, while a worthless security is a loss on an investment. (B)</p> Signup and view all the answers

    If an employee's reimbursements for business expenses are equal to the actual expenses and they provide an accounting of the expenses to their employer, which of the following is true under an accountable plan?

    <p>The reimbursements are excluded from the employee's gross income and the employer deducts the expenses. (A)</p> Signup and view all the answers

    What happens to excess reimbursements in an accountable plan if the employee substantiates the expenses?

    <p>The excess reimbursements are returned to the employer. (B)</p> Signup and view all the answers

    Which of the following is NOT a deductible expense for business travel?

    <p>Personal expenses while on a business trip (D)</p> Signup and view all the answers

    When can an employee deduct the standard mileage rate instead of actual expenses for business travel?

    <p>The standard mileage rate can always be used as an alternative to actual expenses. (C)</p> Signup and view all the answers

    Which of the following is deductible as a business expense for a business trip?

    <p>The cost of dry cleaning a suit while on a business trip. (C)</p> Signup and view all the answers

    What is the deductible limit on meals for a business trip?

    <p>50% of the cost of meals is deductible. (B)</p> Signup and view all the answers

    When can an employee deduct the cost of lodging for a business trip?

    <p>Only when the employee is required to spend the night due to the length of the trip. (B)</p> Signup and view all the answers

    What is the appropriate treatment for unreimbursed employee expenses when an employee submits a detailed accounting to their employer for the expenses?

    <p>The employee is not allowed to deduct unreimbursed employee expenses. (A)</p> Signup and view all the answers

    Which of the following scenarios would NOT be considered a deductible bad debt?

    <p>A worthless corporate security purchased by an individual investor. (A)</p> Signup and view all the answers

    A cash basis taxpayer is unable to claim a bad debt deduction because:

    <p>They do not report income until it is received. (A)</p> Signup and view all the answers

    A business owner loans $10,000 to a friend who later declares bankruptcy. The loan is now considered uncollectible. Which of the following is true?

    <p>The business owner cannot deduct the loss as it is a non-business bad debt. (D)</p> Signup and view all the answers

    Which of these scenarios describes a deductible bad debt?

    <p>A loan made to a business partner that becomes uncollectible. (A)</p> Signup and view all the answers

    A business owner has a worthless corporate security. Which of the following is true?

    <p>The business owner cannot claim a deduction because worthless securities are ineligible for deductions. (C)</p> Signup and view all the answers

    No deduction is allowed for bad debts which are primarily personal in nature. What are the exceptions to this rule?

    <p>The travel expenses of a taxpayer's spouse unless there is a bona fide business purpose for the spouse's presence, the spouse is an employee, and the expenses would otherwise be deductible. Also, directly related business expenses while at the destination. (B)</p> Signup and view all the answers

    When travelling outside the U.S., the ______ is not required for transportation expenses.

    <p>allocation</p> Signup and view all the answers

    Transportation expenses when traveling within the US are 100% deductible if the primary purpose is business but 0% deductible if the primary purpose is personal. Why is there no proportional allocation for transportation costs when traveling within the US?

    <p>A personal vacation was not a major consideration or at least 75% of the time was spent on business. (A)</p> Signup and view all the answers

    A taxpayer can show that his or her attendance at a convention benefits his or her trade or business by comparing the convention agenda with the official duties and responsibilities of his or her position. Which of the following statements is incorrect?

    <p>Expenses for a convention or meeting in connection with investments, financial planning, or other income-producing property are deductible (C)</p> Signup and view all the answers

    With regard to reimbursements for employee expenses which of the following statements is correct?

    <p>If excess reimbursements are returned to the employer, and the employee substantiates the expenses, the reimbursements are excluded from the employee's gross income. (C)</p> Signup and view all the answers

    What is the rule of thumb for deductible expenses under $75?

    <p>No documentation is required (D)</p> Signup and view all the answers

    A bad debt deduction is allowed only for what type of debt?

    <p>A bad debt deduction is allowed only for a bona fide debt arising from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. (C)</p> Signup and view all the answers

    Money lent to a relative or friend with the understanding the relative or friend may not repay it must be considered a gift by the taxpayer, not as a loan, and it may not be deducted as a bad debt.

    <p>True (A)</p> Signup and view all the answers

    A cash-basis taxpayer has no basis in accounts receivable and generally has no deduction for bad debts.

    <p>True (A)</p> Signup and view all the answers

    A business bad debt is one incurred or acquired in connection with or closely related to the taxpayer's trade or business. What is the primary motive for a business-related bad debt?

    <p>The primary motive is for a taxpayer to make a loan to a client, supplier, employee, or distributor for a business reason. (A)</p> Signup and view all the answers

    What is the general rule for a nonbusiness bad debt?

    <p>A nonbusiness bad debt is deductible when it becomes 100% worthless, and it is then treated as a short-term capital loss. (D)</p> Signup and view all the answers

    What is the difference between a bad debt and a capital loss?

    <p>A bad debt is deductible as an ordinary loss, and a capital loss is deductible as a long-term capital loss. (C)</p> Signup and view all the answers

    Taxpayers cannot take a bad debt deduction for a loan made to a corporation, if based on the facts and circumstances, the loan is actually a contribution to capital.

    <p>True (A)</p> Signup and view all the answers

    Taxpayers can take a bad debt deduction only if the amount owed was previously included in gross income.

    <p>True (A)</p> Signup and view all the answers

    If a taxpayer uses the cash method of accounting, (s)he generally reports income when payment is received. A taxpayer cannot take a bad debt deduction for amounts owed because those amounts were never included in income.

    <p>True (A)</p> Signup and view all the answers

    What are the methods used to figure out allowable bad debt deductions for tax purposes?

    <p>The reserve method and the specific write-off method are only used for financial accounting purposes. (C)</p> Signup and view all the answers

    Investments are not treated as a trade or business.

    <p>True (A)</p> Signup and view all the answers

    A shareholder loan to protect his or her investment in the corporation is not treated as a business loan.

    <p>True (A)</p> Signup and view all the answers

    A partially worthless nonbusiness bad debt is deductible.

    <p>False (B)</p> Signup and view all the answers

    A wholly worthless nonbusiness debt is deducted in the year it becomes worthless, and it is then treated as a short-term capital loss.

    <p>True (A)</p> Signup and view all the answers

    Worthless corporate securities are not considered bad debts, they are generally treated as a capital loss.

    <p>True (A)</p> Signup and view all the answers

    If a taxpayer uses the cash method of accounting, she generally reports income when payment is received, and a taxpayer cannot take a bad debt deduction for amounts owed because those amounts were never included in income.

    <p>True (A)</p> Signup and view all the answers

    The reserve method and the specific write-off method are only used for financial accounting purposes.

    <p>False (B)</p> Signup and view all the answers

    If the specific write-off method is used, a taxpayer can deduct specific bad debts that become either partly or totally worthless during the tax year.

    <p>True (A)</p> Signup and view all the answers

    Taxpayers can deduct specific bad debts that become partly uncollectible.

    <p>True (A)</p> Signup and view all the answers

    The tax deduction is limited to the amount charged off on the books during the year.

    <p>True (A)</p> Signup and view all the answers

    Study Notes

    Travel Expenses

    • Ordinary and necessary travel expenses are deductible when away from home overnight for business purposes, including meals (with a 50% limit).
    • Travel is not deductible if primarily personal, unless directly-related business expenses are present at the destination.
    • Spouse's travel expenses aren't deductible unless there's a business purpose, the spouse is an employee where expenses would otherwise be deductible, or the spouse's presence is for a bona fide business purpose.
    • Commuting expenses between home and work are not deductible. Home is considered the taxpayer's regular or principal place of business, or if none exists, the taxpayer's regular place of residence.
    • If a work location is indefinite, travel expenses aren't deductible as it is considered a change of tax home location.
    • Travel for attending investment meetings or education (e.g., language improvement) isn't deductible.
    • Deductible meal percentage for Department of Transportation employees is 80%.
    • Transportation costs between home and the business location are deductible, even when the destination involves a cruise ship.

    Automobile Expenses

    • Actual automobile expenses (e.g., repairs, gasoline) are deductible.
    • Alternatively, a standard mileage rate of $0.655 per mile (2023) plus other non-automobile expenses (e.g., parking, tolls) are deductible.

    Domestic Travel

    • Domestic travel expenses, excluding transportation, are allocated based on business vs. personal purpose.
    • Transportation expenses are 100% deductible if the primary purpose is business.
    • Transportation is 0% deductible if the primary travel purpose is personal within the US (no proportional allocation for costs).

    Foreign Travel

    • Foreign travel expenses are allocated between business and personal time unless one of the following three exceptions apply.
    • The trip is considered entirely for business if the traveler didn't have control over arranging the trip.
    • The trip is less than a week (7 consecutive days) and personal recreation wasn't the major consideration.
    • The trip is longer than a week, but the foreign travel time spent on nonbusiness activities represents less than 25% of total time away from home during that trip.

    Convention Expenses

    • Convention expenses are deductible if related to the taxpayer's business.
    • Attendance being voluntary or using vacation time doesn't negate deductions.
    • Expenses related to investments, financial planning, or income-producing properties aren't deductible.
    • The convention agenda should show business benefits and responsibilities align with taxpayer's position.

    Reimbursed Employee Expenses

    • If reimbursements = expenses and accounted to the employer, reimbursements aren't included in the employee's income and employer may deduct expenses (accountable plan).
    • This also applies if employee returns excess reimbursements and substantiates the expenses.
    • If excess reimbursements aren't returned or unproven, reimbursements are included in employee's income, and no expenses are deductible.

    Recordkeeping

    • Documentary evidence (receipts, canceled checks, bills) is generally required to support expenses.
    • Evidence shows amounts, dates, locations, and nature of expenses.
    • Canceled check + bill from payee = sufficient evidence for typical business expenses. Canceled check alone does not prove business expense and is insufficient for expenses of over $75, excluding lodging.
    • Lodging expenses above $75 require additional evidence of business purpose.

    Bad Debts

    • Bad debt deduction is allowed for bona fide debts (fixed/determinable amounts) arising from a debtor-creditor relationship.
    • Worthless debt deducted only up to the adjusted basis.
    • Lending money to a relative isn't considered a debt, but rather a gift.
    • Cash basis taxpayers don't have basis in receivables and thus have no bad debt deduction.

    Business Bad Debt

    • Business bad debt arises from business-related activities.
    • Loans to clients/suppliers for business reasons and become worthless, are business debts.
    • Worthless business bad debts are deductible up to the written-off amount.

    Nonbusiness Bad Debt

    • Nonbusiness bad debts are debts that aren't connected to trade/business activities (e.g., investments).
    • Investments do not qualify as trade/business activities.
    • Shareholder loans for investment purposes are not business bad debts.
    • Partially-worthless bad debts aren't deductible and debts fully become worthless during tax year are deducted as short-term capital losses.
    • Debts owed from all sources, including sales, services, rent, and interest, must have been included as income.

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    EA2 Study Unit 5.2 5.4 PDF
    EA2 Study Unit 5.2 5.4 Questions and Bonus PDF

    Description

    Test your knowledge on the treatment of bad debts in taxation. This quiz covers various scenarios related to business and nonbusiness bad debts, including deductions, recoveries, and accounting methods. Increase your understanding of tax implications and requirements for bad debt deductions.

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