Question & Answer

Describe the record-keeping requirements for deducting business expenses, including mixed-motive expenditures.

] Clyde lives and operates a sole proprietorship in Dallas, Texas. This year Clyde found it necessary to travel to Fort Worth (about 25 miles away) for legitimate business reasons. Is Clyde’s trip likely to qualify as “away from home”? Why would this designation matter?

What expenses are deductible when a taxpayer combines both business and personal activities on a trip? How do the rules for international travel differ from the rules for domestic travel?

Susmita purchased a car this year and uses it for both business and personal purposes. Susmita drove the car 11,000 miles on business trips and 9,000 miles for personal transportation. Describe how Susmita will determine the amount of deductible expenses associated with the auto.

Troy operates an editorial service that often entertains prospective authors to encourage them to use Troy's service. This year Troy paid $3,000 for the cost of meals and $6,200 for the cost of entertaining authors. Describe the conditions under which Troy can deduct a portion of the cost of the meals as a business expense. 

Jimmy is a sole proprietor of a small dry-cleaning business. This month Jimmy paid for his groceries by writing checks from the checking account dedicated to the dry-cleaning business. Why do you suppose Jimmy is using his business checking account rather than his personal checking account to pay for personal expenditures?

Peggy is a rodeo clown, and this year she expended $1,000 on special “funny” clothes and outfits. Peggy would like to deduct the cost of these clothes as work-related because she refuses to wear the clothes unless she is working. Under what circumstances can Peggy deduct the cost of her clown clothes? 

Provide an example of an expense associated with the production of tax-exempt income and explain what might happen if Congress repealed the prohibition against deducting expenses incurred to produce tax-exempt income.

What kinds of deductions are prohibited as a matter of public policy? Why might Congress deem it important to disallow deductions for expenditures that are against public policy? 

Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost of $30 per bag. This year, however, Jake purchased 500 bags of dog food from a local pet food company at an average cost of $45 per bag. Under what circumstances would the IRS likely challenge the cost of Jake’s dog food as unreasonable?

Whether a business expense is “reasonable in amount” is often a difficult question. Explain why determining reasonableness is difficult, and describe a circumstance where reasonableness is likely to be questioned by the IRS. 

Explain how cost of goods is treated when a business sells inventory.

What is an “ordinary and necessary” business expenditure? 

Suppose you asked your favorite AI query tool the following question: “What is the Kiddie Tax?”  The AI tool provided the following response:

Sandy and John Ferguson got married eight years ago and have a seven-year-old daughter, Samantha.  In 2024, Sandy worked as a computer technician at a local university earning a salary of $152,000, and John worked part time as a receptionist for a law firm earning a salary of $29,000.  Sandy also does some Web design work on the side and reported revenues of $4,000 and associated expenses of $750.  The Fergusons received $800 in qualified dividends and a $200 refund of their state income taxes.  The Fergusons always itemize their deductions, get the full benefit of deducting the entire amount of state income taxes paid, and their itemized deductions were well over the standard deduction amount last year. 

. In 2024, Jack is single two children, ages 10 and 12.  Jack works full time and earns an annual salary of $195,000 as a consultant. Jack files as a head of household and does not itemize his deductions.  In the fall of this year, he was recently offered a position with another firm that would pay him an additional $45,000.  

Determine the amount of the late filing and late payment penalties that apply for the following taxpayers.

For the following taxpayers, determine the due date of their tax returns.

For the following taxpayers, determine if they are required to file a tax return in 2024.  

This year, Santhosh, a single taxpayer, estimates that his tax liability will be $100,000.  Last year, his total tax liability was $15,000.  He estimates that his tax withholding from his employer will be $35,000.  Is Santhosh required to increase his withholding or make estimated tax payments this year to avoid the underpayment penalty?  If so, how much? 

This year, Paula and Simon (married filing jointly) estimate that their tax liability will be $200,000.  Last year, their total tax liability was $170,000.  They estimate that their tax withholding from their employers will be $175,000.  Are Paula and Simon required to increase their withholdings or make estimated tax payments this year to avoid the underpayment penalty?  If so, how much?

This year Lloyd, a single taxpayer, estimates that his tax liability will be $10,000.  Last year, his total tax liability was $15,000.  He estimates that his tax withholding from his employer will be $7,800.  

a. Is Lloyd required to increase his withholding or make estimated tax payments this year to avoid the underpayment penalty?  If so, how much? 

This year Luke has calculated his gross tax liability at $1,800.  Luke is entitled to a $2,400 nonrefundable personal tax credit, a $1,500 business tax credit, and a $600 refundable personal tax credit.  In addition, Luke has had $2,300 of income taxes withheld from his salary.  What is Luke’s net tax due or refund?

In 2024, Zach is single with no dependents.  He is not claimed as a dependent on another’s return.  All of his income is from salary and he does not have any for AGI deductions.  What is his earned income credit in 2024 in the following alternative scenarios?

a. Zach is 29 years old and his AGI is $5,000.

In 2024, Amanda and Jaxon Stuart have a daughter who is one year old.  The Stuarts are full-time students and are both 23 years old.  Their only sources of income are gains from stock they held for three years before selling and wages from part-time jobs. What is their earned income credit in the following alternative scenarios if they file jointly?