AGI Deductions: Case Study
I:6-33 For or From AGI Deductions. Roberta is an accountant employed by a local firm. During the year, Roberta incurs the following unreimbursed expenses:
Travel to client locations $750
Subscriptions to professional journals $215
Taking potential clients to lunch $400
Photocopying $60
a. Identify which of these expenses are deductible and the amount that is deductible.
Indicate whether they are deductible for or from AGI.
Travel to client locations would be from AGI and would be $750
Subscriptions to professional journals would be from AGI and would be $215
Taking potential clients to lunch would be from AGI for $400
Photocopying would be from AGI for $60
b. Would the answers to Part a change if the accounting firm
reimburses Roberta for these expenses?
Yes: no deductions would be allowed
c. Assume all of the same facts as in Part a, except that Roberta is self-employed. Identify which of the expenses are deductible, and indicate whether they are deductions for or from AGI.
Travel to client locations would be for AGI and would be $750
Subscriptions to professional journals would be for AGI and would be $215
Taking potential clients to lunch would be for AGI but only for $200 because meals are only 50% deduction
Photocopying would be for AGI for $60
I:6-35 Capitalization vs. Expense. Rentals R Us incurs the following expenditures on an apartment building it owns:
Replace the roof $25,000
Repaint the exterior 7,000
Install new locks 1,500
Replace broken windows 1,200
Replace crumbling sidewalks and stairs 7,000
Discuss the proper tax treatment for these expenditures.
Replacing the roof would be capitalized because it adds value. Repainting the exterior would be an expense deduction because it is maintenance. Installing new locks would also be an expense deduction for maintenance. Replacing broken windows also falls under the expense for maintenance category so it also is an expense deduction. Replacing the crumbling sidewalks and stairs is capitalized because replacing those adds value to the life of an asset.
I:6-37 Legal and Accounting Expenses. Sam is a sole proprietor who owns, leases, and manages several apartment complexes and office buildings. During the current year, Sam incurs the following expenses. Which of these expenditures are deductible? Are they for or from
AGI deductions?
a. $200 in attorney’s fees for title searches on a new property Sam has acquired.
Attorney’s fees are for AGI and are deductible.
b. $450 in legal fees in an action brought to collect back rents.
Legal fees in an action brought to collect back rents would be for AGI and are deductible.
c. $500 to his CPA for the preparation of his federal income tax return. $400 is for the preparation of Schedule C (Profit or Loss from Business).
Expense for the preparation of a federal income tax return is from AGI.
d. $300 in attorney’s fees for drafting a will.
Attorney’s fees for drafting a will are for AGI but are not deductible because they are for personal use.
e. $250 in attorney’s fees in an unsuccessful attempt to prevent the city from rezoning the area of the city where several of his office buildings are located.
Attorney’s fees used for this purpose are deductible because they are considered necessary expense. These fees are for AGI.
Travel to client locations $750
Subscriptions to professional journals $215
Taking potential clients to lunch $400
Photocopying $60
a. Identify which of these expenses are deductible and the amount that is deductible.
Indicate whether they are deductible for or from AGI.
Travel to client locations would be from AGI and would be $750
Subscriptions to professional journals would be from AGI and would be $215
Taking potential clients to lunch would be from AGI for $400
Photocopying would be from AGI for $60
b. Would the answers to Part a change if the accounting firm
reimburses Roberta for these expenses?
Yes: no deductions would be allowed
c. Assume all of the same facts as in Part a, except that Roberta is self-employed. Identify which of the expenses are deductible, and indicate whether they are deductions for or from AGI.
Travel to client locations would be for AGI and would be $750
Subscriptions to professional journals would be for AGI and would be $215
Taking potential clients to lunch would be for AGI but only for $200 because meals are only 50% deduction
Photocopying would be for AGI for $60
I:6-35 Capitalization vs. Expense. Rentals R Us incurs the following expenditures on an apartment building it owns:
Replace the roof $25,000
Repaint the exterior 7,000
Install new locks 1,500
Replace broken windows 1,200
Replace crumbling sidewalks and stairs 7,000
Discuss the proper tax treatment for these expenditures.
Replacing the roof would be capitalized because it adds value. Repainting the exterior would be an expense deduction because it is maintenance. Installing new locks would also be an expense deduction for maintenance. Replacing broken windows also falls under the expense for maintenance category so it also is an expense deduction. Replacing the crumbling sidewalks and stairs is capitalized because replacing those adds value to the life of an asset.
I:6-37 Legal and Accounting Expenses. Sam is a sole proprietor who owns, leases, and manages several apartment complexes and office buildings. During the current year, Sam incurs the following expenses. Which of these expenditures are deductible? Are they for or from
AGI deductions?
a. $200 in attorney’s fees for title searches on a new property Sam has acquired.
Attorney’s fees are for AGI and are deductible.
b. $450 in legal fees in an action brought to collect back rents.
Legal fees in an action brought to collect back rents would be for AGI and are deductible.
c. $500 to his CPA for the preparation of his federal income tax return. $400 is for the preparation of Schedule C (Profit or Loss from Business).
Expense for the preparation of a federal income tax return is from AGI.
d. $300 in attorney’s fees for drafting a will.
Attorney’s fees for drafting a will are for AGI but are not deductible because they are for personal use.
e. $250 in attorney’s fees in an unsuccessful attempt to prevent the city from rezoning the area of the city where several of his office buildings are located.
Attorney’s fees used for this purpose are deductible because they are considered necessary expense. These fees are for AGI.