- What amount may she deduct on Schedule C for the home office for 2025?
Answer: $6,710
IRC § 280A(c)(1) and (c)(5). The business-use percentage is 200 ÷ 2,000 = 10%. Indirect expenses that benefit the entire home are allocated by that percentage: mortgage interest $14,400 + real estate taxes $6,000 + insurance $3,600 + utilities $2,400 + repairs $1,800 + housekeeping $900 = $29,100; 10% of $29,100 = $2,910. The $800 painting expense is a direct expense benefiting only the office, so it is deductible in full. The $3,000 home-office depreciation is also added. Total: $2,910 + $800 + $3,000 = $6,710. Her $42,000 net profit is more than enough to avoid the §280A(c)(5) gross-income limitation. Choice D ($6,710) is correct. Choice A ($3,710) omits the $3,000 depreciation. Choice B ($4,670) excludes the business portion of mortgage interest and real estate taxes on the theory that they belong only on Schedule A; the business-use portions are claimed on Schedule C as part of the home-office deduction. Choice C ($5,990) applies the 10% allocation to the direct painting expense, but direct expenses benefiting only the office are not allocated.
- What amount can she deduct for vehicle expenses on Schedule C for 2025?
Answer: $9,970
IRC §§ 162(a) and 262(a). Under the actual expense method, actual vehicle expenses—including depreciation and vehicle loan interest—are multiplied by the business-use percentage, and the personal-use portion is not deductible. Business percentage: 12,600 ÷ 18,000 = 70%. Total actual expenses: $3,800 + $2,100 + $1,400 + $300 + $1,200 + $5,000 = $13,800. Business portion: 70% × $13,800 = $9,660. Business parking fees and tolls are added separately: $9,660 + $310 = $9,970. Choice C ($9,970) is correct. Choice A ($6,470) omits depreciation from the actual expenses; depreciation is a deductible vehicle expense under the actual method. Choice B ($9,130) omits the loan interest from the expenses; the business portion of vehicle loan interest is deductible under the actual method. Choice D ($14,110) deducts all actual expenses and parking/tolls without reducing them for personal use.
- How should these amounts be treated on her 2025 Schedule C?
Answer: Deduct the $2,400 as a repair and capitalize and depreciate the $18,000.
Under IRC § 162 and Treas. Reg. § 1.162-4, incidental repairs that keep tangible property in an ordinarily efficient operating condition are currently deductible, while Treas. Reg. § 1.263(a)-3 requires capitalization of amounts paid to restore property, including the replacement of a major component or substantial structural part of the unit of property, such as an entire building system. The $2,400 roof patch is an incidental repair that keeps the roof in working condition and does not replace a major component, so it is deductible. Replacing the entire heating and air-conditioning system replaces a major building system and is a restoration that must be capitalized and depreciated; the fact that the system had failed does not make the replacement a repair. Choice D is correct. Choice A treats the HVAC replacement as a repair, ignoring the restoration rule for major components. Choice B reverses the proper treatment of the two expenditures. Choice C treats the roof patch as a capital improvement even though it is not a betterment, restoration, or adaptation to a new use.
- What amount may the consultant deduct on his 2025 Schedule C for the tickets and the meal?
Answer: $130
IRC § 274(a) disallows any deduction for entertainment, amusement, or recreation activities, and IRC § 274(n)(1) limits the deduction for business meals to 50% of the amount otherwise allowable. The basketball tickets are an entertainment activity, so none of the $600 is deductible for 2025 even though business was discussed during the game. The separately purchased restaurant meal qualifies as a business meal, so 50% × $260 = $130 is deductible. Choice A is correct. Choice B applies the 50% limitation to the tickets as well as the meal; entertainment is entirely disallowed, not reduced to 50%. Choice C deducts the meal at 100%, reflecting the temporary restaurant-meal rule that expired after 2022; business meals are subject to the 50% limitation in 2025. Choice D deducts both items at 100%, ignoring both the entertainment disallowance and the meals limitation.
- Which of the following is correct for 2025 regarding the deduction of meals and entertainment expenses incurred in a trade or business?
Answer: Expenses for entertainment, amusement, or recreation generally are not deductible, but the cost of business meals with a customer is deductible at 50 percent of the amount if the meals are not lavish or extravagant under the circumstances.
IRC § 274(a), (k), and (n). Under current law, no deduction is allowed for an activity of a type generally considered to constitute entertainment, amusement, or recreation. Business meals are treated differently: food and beverage expenses are generally deductible at 50 percent of the otherwise-deductible amount if they are ordinary and necessary, are not lavish or extravagant under the circumstances, are provided to the taxpayer or a business associate, and the taxpayer or an employee is present. Choice A is correct. Choice B is wrong because, under current law, entertainment, amusement, and recreation expenses are generally disallowed in full, not 50 percent deductible. Choice C is wrong because the pre-2018 rule allowing an entertainment deduction when the entertainment directly preceded or followed a substantial business discussion was repealed; such entertainment is not deductible in 2025. Choice D is wrong because a meal purchased separately from any entertainment is still subject to the 50 percent limit; it is not 100 percent deductible.
- What amount may the photographer deduct on his 2025 Schedule C for the airfare, seminar fee, and meals?
Answer: $230
Treas. Reg. § 1.162-2(b)(1) provides that when a trip is primarily personal, the cost of transportation to and from the destination is not deductible, but expenses properly allocable to business activities at the destination are deductible. The photographer spent six of the seven days on personal activities, so the trip is primarily personal and the $700 airfare is not deductible. The $200 seminar fee is deductible because the seminar maintains or improves skills used in his existing business, and the $60 of meals on the seminar day is subject to the 50% limitation of IRC § 274(n)(1), giving 50% × $60 = $30. The total deduction is $230. Choice A is correct. Choice B prorates the airfare by the number of business days; transportation costs are not prorated by days — they are fully deductible for a primarily business trip and not deductible at all for a primarily personal trip. Choice C treats the trip as primarily business merely because the photographer attended a seminar, ignoring the primary-purpose test based on time spent. Choice D makes the same error and also deducts the meals at 100%, ignoring the 50% limitation.
- Which of the following is correct for a tax year beginning in 2025 regarding the deduction of business interest under IRC § 163(j)?
Answer: A taxpayer's deduction for business interest is generally limited to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest; for a tax year beginning in 2025, depreciation, amortization, and depletion are added back in computing adjusted taxable income, and interest disallowed by the limitation is carried forward indefinitely.
IRC § 163(j)(1) and (2). For tax years beginning in 2025, a taxpayer's deduction for business interest is generally limited to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest. Under the One Big Beautiful Bill Act, depreciation, amortization, and depletion are again added back in computing adjusted taxable income for tax years beginning after December 31, 2024, so adjusted taxable income is once more computed on an EBITDA basis. Business interest disallowed by the limitation is treated as business interest paid or accrued in the succeeding taxable year and is carried forward indefinitely. Choice A states these rules correctly. Choice B misstates the adjusted-taxable-income rule: it reflects the rule for tax years beginning in 2022 through 2024, under which depreciation, amortization, and depletion were not added back. Choice C misstates the carryover: no carryback of disallowed business interest is allowed, and the carryforward is indefinite, not 20 years. Choice D misstates the small business exception: the limitation generally does not apply to a taxpayer with average annual gross receipts of $31 million or less for the three preceding tax years, but a tax shelter cannot qualify for the exception.
- What is the correct treatment of the $12,000 receivable and the $5,000 loan on her 2025 Schedule C?
Answer: Deduct $5,000 as a business bad debt and deduct nothing for the $12,000 receivable.
IRC § 166(a) allows a deduction for business debts that become wholly worthless in the year of worthlessness, but a cash-basis taxpayer has no basis in an unpaid receivable that was never included in income. Because the designer uses the cash method, the $12,000 receivable was never included in her gross income, so its worthlessness produces no deduction. The $5,000 loan, however, was made to protect a key source of equipment for her business; it is a business debt, and it is deductible as an ordinary business bad debt in 2025, the year it became wholly worthless. Choice B is correct. Choice A treats the uncollected receivable as a bad debt even though the cash-basis taxpayer has no basis in it. Choice C reverses the treatment: the receivable is not deductible, and the loan is a business bad debt, not a nonbusiness bad debt, because it was made in connection with her business. Choice D misclassifies the business bad debt as a nonbusiness bad debt; a nonbusiness bad debt is treated as a short-term capital loss, but this debt qualifies as a business debt giving an ordinary deduction.
- Which of the following is correct for 2025 regarding the deductibility of fines, penalties, and similar amounts paid to a government?
Answer: A fine or similar penalty paid to a government for the violation of any law is not deductible, and an amount paid to a government in relation to an investigation is not deductible unless it constitutes restitution for harm caused, compliance costs, or taxes due.
IRC § 162(f) and (f)(2). No deduction is allowed for any fine or similar penalty paid to a government for the violation of any law, and the disallowance applies without regard to the taxpayer's intent. In addition, amounts paid to or at the direction of a government in relation to the violation of any law or an investigation into a potential violation are not deductible, except for amounts constituting restitution for damage or harm caused by the violation, amounts paid to come into compliance with the law, and amounts paid as taxes due. Choice D states these rules correctly. Choice A misstates the rule for investigation payments: deductibility does not depend on whether the investigation ends in a conviction, and a payment made in relation to an investigation is disallowed. Choice B misstates the fine rule: an unintentional violation does not make a fine deductible. Choice C misstates the rule in two ways: a fine is not deductible merely because payment is needed to obtain or keep a license, and the same rules apply to payments made to state, local, and federal governments.
- Which of the following is correct for 2025 regarding the tax treatment of research or experimental expenditures?
Answer: Qualified domestic research or experimental expenditures paid or incurred in a tax year beginning in 2025 are currently deductible unless the taxpayer elects to amortize them over at least 60 months, and qualified foreign research or experimental expenditures are amortized ratably over 15 years.
IRC § 174A. For tax years beginning after December 31, 2024, qualified domestic research or experimental expenditures are currently deductible, and the taxpayer may elect instead to amortize them over a period of at least 60 months (or over a 10-year period). Qualified foreign research or experimental expenditures are amortized ratably over a 15-year period. Choice B states these rules correctly. Choice A reflects the rule that applied for tax years beginning in 2022 through 2024, when domestic research expenditures had to be capitalized and amortized over 60 months; that mandatory amortization no longer applies for 2025. Choice C errs as to foreign expenditures: they are not currently deductible even if the taxpayer maintains separate books and records; the 15-year amortization applies. Choice D reverses the two periods: domestic expenditures are currently deductible (or electively amortized over at least 60 months), while foreign expenditures are amortized over 15 years, not 60 months.
- What amount can she deduct on Schedule C for these travel expenses for 2025?
Answer: $2,275
IRC §§ 162(a)(2), 274(a), and 274(n)(1). Airfare ($1,200), hotel ($850), and dry cleaning and laundry ($75) are deductible travel expenses incurred while away from home on business. Business meals are subject to the 50% limitation, so the $300 of client meals produces a deduction of $150. The theater tickets are an entertainment expense; for 2025, entertainment expenses are not deductible even if they follow a substantial business discussion. Total: $1,200 + $850 + $75 + $150 = $2,275. Choice A ($2,275) is correct. Choice B ($2,425) deducts the full $300 of meals instead of applying the 50% meals limit. Choice C ($2,475) applies the 50% limit to the theater tickets ($200) as though entertainment were still deductible; it is not. Choice D ($2,675) deducts the full $400 ticket cost while correctly limiting the meals.
- Which statement is correct regarding the deduction for the vans for 2025?
Answer: He may not use the standard mileage rate for any van and must deduct actual expenses for the six-van fleet.
For 2025, Notice 2025-5 sets the business standard mileage rate at 70 cents per mile, and the standard mileage rate rules, as explained in IRS Pub. 463, provide that a taxpayer who operates five or more vehicles at the same time may not use the standard mileage rate for any of them. Because the plumber operates six vans at the same time, he must use the actual expense method for all six vans. Choice C is correct. Choice A applies the more-than-50% business-use test of IRC § 280F(b)(2); that test governs a taxpayer's ability to claim § 179, bonus, or accelerated depreciation on listed property under the actual expense method, not the availability of the standard mileage rate. Choice B invents a per-vehicle election; the five-or-more-vehicle bar applies to the fleet as a whole. Choice D inverts a real rule: claiming accelerated depreciation, § 179, or the special depreciation allowance bars the standard mileage rate, but never having claimed depreciation does not bar it.
- Which of the following is correct for 2025 regarding the deduction for business use of a home under IRC § 280A?
Answer: A self-employed taxpayer may deduct expenses for a home office used exclusively and regularly as the principal place of business, including a home office used for administrative or management activities if no other fixed location of the business is used for substantial administrative or management activities.
IRC § 280A(c)(1). A home office deduction is allowed for a portion of the home used exclusively and regularly as the taxpayer's principal place of business, as a place to meet patients, clients, or customers in the normal course of business, or as a separate structure used in connection with the business. For the principal-place-of-business test, a home office used for administrative or management activities qualifies only if there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities. Choice C states this rule correctly. Choice A misstates the administrative/management safe harbor: a greater number of hours at home does not cure the existence of another fixed location at which the taxpayer conducts substantial administrative or management activities. Choice B misstates the exclusive-use requirement: the business area generally must be used only for business, and exclusive use is not satisfied merely because business is the primary use. Choice D misstates the client-meeting basis: meeting or dealing with clients in the home office is an independent qualifying use, and it need not be the most important business activity conducted in the home office.
- Which statement is correct regarding the deduction for the business use of the home office for 2025?
Answer: She may not deduct home office expenses because the room is also used for personal purposes and is not used exclusively for business.
IRC § 280A(c)(1) permits a home-office deduction only for a portion of the home used regularly and exclusively for business, and the portion must be the principal place of business, a place used to meet clients, or a separate structure. The real estate agent's office satisfies the principal-place-of-business test: under the flush language of § 280A(c)(1), an office used for administrative or management activities is the principal place of business when there is no other fixed location where the taxpayer conducts substantial administrative or management activities, so client visits are not required. The facts, however, also require exclusive use. Because her mother slept in the room, the room was put to personal use, and the exclusive-use requirement is not met; no home-office deduction is allowed. Choice D is correct. Choice A applies the principal-place-of-business test but overlooks the failure of the exclusive-use requirement. Choice B imposes a client-visits requirement, which is not a condition when the principal-place-of-business test is satisfied. Choice C is wrong because the simplified method also requires regular and exclusive use of the home office; it does not relax the exclusivity requirement.
