Ch 6 Business and travel Expenses

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Where do sole proprietorships deduct Trade or Business Expenses?
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Schedule C
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What is the generally agreed upon defition of Trade or Business?
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Any active that is engaged in profit. The profit motive is necessary and the activity should be enggaged in continuity and regularity.
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Income reported in Schedule C includes: -Where is income for independent contractor reported?
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Gross reciepts from W-2, independent contractor work, and amounts reported to taxpayer on a Form W-2 as Statutory Employee Indepndent Contractor income is reported in Form 1099-MISC
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What is a Stutory Employee? (4 examples)
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1.) full time life insurance agents 2.) certain agents or commision drivers 3.) traveling sales persons 4.) certain at home workers
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How is the COGS treated in tax?
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you itemize and any indirect operating if for 3 previous tax periods your gross reciepts are larger than $10 mm
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For an expense to be itemized as Trade or Business, which three things must hold true?
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1.) Ordinary – must be customary or usual in taxpayers business 2.) Necessary – expense is approperiate and helpful rather than necessary 3.) Reasonable – must be reasonable in amount and reasonable in related purpose
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Which 3 expenses are forbidden for deduction?
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1.) Illegal bribes, kickbacks, and other payments 2.) Payment for certain lobbying and politcal expenses 3.) Payment for fines & penalties
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Depreciation or Cost Recovery – what is its purpose? – What is it allowed for? -what is in not allowed for?
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The depreciaiton allowance is allowed for wear or loss of usefulness of a business asset. Depreciation is allowed for every tangible asset, except land, in business or for production of income.
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What are the 4 Components of Depreciation
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1.) Basis 2.) Depreciation Periods 3.) Depreciaion Convention 4.) Depreciation Method
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Depreciable Basis – what is it? – what is it if inherited? – what is it if converted from personal use to business use? -what if its a trade-in?
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Basis is a intial cost If inherited= basis is FMV at death of descendant If converted= basis is lower of FMV or cost at date of conversion If Trade In= cost of new asset less deferred gain on old asset
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Depreciable Periods (Class lives of assets) – what is the difference between real and personal property?
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Real property = consists of land and buildings as well as any structural component attached to land. Personal Property = includes equipment, furniture, fixtures, or anything else not classifed as real.
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Depreciation Conventions – what are the three? – when do you use them?
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1.) Half Year – treats all property in service 2.) Mid-Quarter – Dont worry about 3.) Mid-Month – only applies to real property (27.5, 31.5, 39 years)
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List exmaples of typical assets for MACRS purpose: 3 year 5 year 7 yera 10 year 15 year 20 year 27.5 year 31.5 year 39 year
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3. Race horses (less then 2 yrs old) & certain specialized industry tools 5.) Autos, light trucks, computers and peripheral equipment 7.) Furniture, fixtures, and equipment 10.) Vessels, Bores, Tugs, Fruit-or-nut bearing tress 15.) Wastewater treatment plants & telephone distrubtion plants 20.) Farm buildings 27.5) Residential Real Property 31.5) Non residential between 1987-1993 39.) Nonresidential property after 1993
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Convention for year of Disposal
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Regardless of convention required by asset, the property is subject to the same convention in year of disposal
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3 Depreication Methods Allowed under MACRS Property on or after 1987:
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1.) 200% Decling Balance switching to Straight line – required for all 3,5,7,10 yr property 2.) 150% Declining Blance switching to Straight line – 15 and 20 year 3.) Straight Line – In both cases, the depreciaiton swithces to straight line in the tax year which straight line yields a higher depreciable amount
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IRC S 179 Expense Election – what is it? – what is maximum deduction -what is maximum cost of personal property? -when is deduction eliminated? -What did the American Relief Act of 2012 extend in the elections coverage?
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Instead of MACRS, a taxpayer can elect to expense a certain portion of personal property purchase during the year. -Max is $500,000 -Maximum cost is $2,000,000 -Deduction is eliminated after $2,500,000 -includes Qualified Real Property
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What are the 4 limitations of the IRC 179 Expense Election?
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1.) Used in active Trade or Business – property associated with rental or investment is not eligible 2.) The 179 expense cannot create a net operating loss 3.) The property cannot be acquired from (a) related party or (b) gifts an inheritences 4.) Trade-in property is limited to cash paid for property
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What are the 2 eligible property for the 50% Bonus Depreciation?
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1.) Property with MACRS recovery period of less than 20 years 2.) Property acquired and placed in service on or after Jan 1, 2008 and before Dec 31, 2013
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What is Listed Property? – give examples PA. OT. ERA. C. T – when is IRC 179 election eligible for this property? -what do you do if you fall below threshold after electing deductions?
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Property that is used for both personal use and business use. 1.) Passenger Autombiles 2.) Any other property used for transportation excluding use for business 3.) Any property of a type generally used for entertainment, recreation, or amusement (boat) 4.) Any computer or peripheral equipment 5.) Any celluar telephone or other telecommunication equipment -needs to be used more than 50% for business, only those business expenses are deducted -If you fall below threshold, you must switch to Straight line
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What is the difference between Passanger Autos and Light Trucks?
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Passanger Autos= 4 wheel; used for public roads; gross weight cannot exceed 6,000 lbs Light Trucks= 6,000 lbs or less, slightly higher limit
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Leased Vehicles -where are the rules located from IRS? – What is the “lease inclusion amount”? – when is full lease payment deducted? -how is income from leased vehicles related to the deduction
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– Revenue Procedures – is based on vehicles FMV and tax year which lease began – fully deducted unless business use is less than 100% -income inclusion reduces the net reduction
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Transportation -what is it defined as Travel -what is it defined as? Which type of expenses are deducted for travel and transportation?
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Transportation= means expenses of getting from work place to another workplace Travel= refers to business travel away from home area that requires overnight stay Ordinary and Necessary travel and transportation expenses are deducted.
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What 4 situtations allow taxpayer to deduct local transportation expenses? -what is a tax home?
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1.) Workplace to workplace for business 2.) Visiting clients or customers 3.) Going to business meeting away from regular workplace 4.) Home to temporary workplace, when taxpayer has more then one places of work. -Tax home is regular place of work
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What are the two deduction methods for Automobile expenses?
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1.) Standard Mileage Rate 2.) Actual Costs
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What 2 situations can you apply the Standard Mileage Rate? What 3 instances occur where the Standard Mileage Rate not be used? What is the Standard Mileage Rate
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1.) Taxpayer owns the vehicle and uses Standard mileage rate in first year 2.) Taxpayer leases the auto and uses the standard mileage for entire lease period 1.) Auto claimed depreciation (other then straight line) 2.) Auto is for hire (taxis) 3.) Taxpayer operates five or more cars simultaneously in business operation $0.56/mile
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What costs are included when calcualtion the Actual Cost of Auto expense? What is the mileage allowance for actual cost purposes?
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1.) Depreciation 2.) Gas, oil, repairs 3.) Insurance, license, registration fees $0.22/mile
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Travel Expenses -what is the basic requirement? -what is the “travel away from home” standard -what is the max time a work assignment can be deductible for?
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basic requirement is trip must require sleep or rest -is that it allows the deduction of meals, lodging, and other incidental expenses such as dry cleaning. Must be ENTIRELY business related. – if temporary work assignment lasts less than 6 months, expenses can be deducted.
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Limits on travel costs: If trips primary purpose is: (a) vaction (b) work The treatment fo transportation costs is? (deducted/not deducted) Treatment of business expenses regardless of treatment of transportation costs is? (deducted/not deducted)
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(a) not deducted; deducted (b) deducted; deducted
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What are the 4 rules for determining whether foreign tavel is considered a business travel? ONLY NEEDS TO MEET ONE RULE TO PASS How is the Cost deducted calculated? DONT COUNT BUSINESS HOLIDAYS
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1.) No control over arranging trip 2.) Outside US no more than 7 days 3.) Less than 25% of time spent on personal activities (days on which trip began and ended are counted 4.) Vacation is not major consideration for taxpayer Total Trip Cost * (Business Days/Total Days)
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Deductibility of Meals and Entertainment – what is the limit on the deduction amount? -what types are dissallowed in deductibility? -what is the treatment for self-employed taxpayers? -What 3 requirements must be met to reach Self-employed Meal and Entertainment Deduction. -What tests must be met for deductiblity of meals and entertainment?
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-limited to 50% of costs incurred; must be for business -if for personal use, club dues or membership fees are excluded – Can deduct 100% in certain circumstances 1.) Independent Contractor 2.) Customer reimbuses taxpayer or gives allowances for expenses in connection 3.) Taxpayer provides adequate records of the expense customer or client 1.) Directly Related Test: -Activity took place in clear business setting -main purpose was the active conduct of business 2.) Associated Test – Activity was associated with the trade or business – Entertainment immeadiately preceed or followed business negotiations
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Business Use of Home – when can you deduct? -Where do you deduct? -what is the “Exclusive Use Test”? -what is the “Regular Use Test”?
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– you can deduct if home is used exclusively, reguarly, and for trade or business use -you deduct under Miscellaneous under Schedule A – Exlcusive Test is satisfied if a specific area of income is used only for the trade or business (seperate room) -Regualr Use Test is satisfied when a taxpayer must use the home office on a continuing basis, not occasionally or incidently
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What 3 things must we consider when determining whether a home is a principal place of business?
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1.) What is the relative importance of the activities performed at each location 2.) What amount of time is spent at each business location 3.) Business home use also includes administration or managment services if there is no other fixed location to conduct such basis
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How do we calculate the deduction for home office deduction of self-employed? -what are direct expenses? give examples – what are indirect expenses? give examples -when can u deduct portions of indirect expenses
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calculate square footage of used reguarly and exclusively for business. Must spereate expenses into (a) Direct and (b) Indirect Direct expenses are the business part of the home and are fully deductible (repairs and painting) Indirect expenses are costs of upholding the entire household; you multiply by %. Ex. Insurance, utilities, taxes, interest. Only if gross income is positive can the business deduct portions of indirect costs, depreciation is last
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How do you calcualte Gross income when determining whether or not to deduct certain Indirect costs associated with home office?
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Income – regular trade or business expenses (non-home related) – Home related office expenses (mortage, taxes) =Gross Income
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Business Bad Debts – what is the general treatement of bad debt losses of business? -What does it mean to be bona-fide? -What is Bona-fide Business bad Debt? -What is the difference between nonbusiness bad debt and business bad debt for tax purposes? -How is accounts recievable and notes recievable treated in bad debt deductions?
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– generally deducted as ordinary deductions in trade or business. -bonafide hints at a tradtional debtor/creditor relationship based on valid and enforacble obligations to pay a fixed sum of money. -refers to debt considered ordinary, necessary, and reasonable in trade or business. -Nonbusiness Bad Debt= is treated as a ST capital loss and can be deducted only when completely worhtless Business bad Debt= can be deducted when either partially or fully worthless and is treated as ordinary deduction. Accounts receivable and Notes recievable is only treated as deductible bad debt expenses if it was previously recorded in income on Schedule C.
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Business Casualty Loss what is amount deducted if (a) completly ruined (b) partially ruined
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(a) fully deducted (b) either the lower of decrease in FMV before and after casualty or the adjusted basis.
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Hobby Loss Rules -where is the income from hobby activities reported? -where are expenses reported for hobbys? -Who has burden of proof for hobby practice? When does burden of proff shift to IRS?
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– income from hobby activities is reported in Form 1040 as “Other Income” -expenses are itemized under Miscellaneous Expenses under -taxpayer has inital burden of proof until his hobby shows profit in 3 out of 5 consecutive tax years
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What 3 expenses are allowable as Hobby Deduction?
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1.) normal expenses 2.) expenses that don’t reduce basis of property (utilities, supplies) 3.) expenses that do reduce basis of property (depreciation)
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What 2 instances occur where educator expenses are deductible? What 2 instances occur where educator expenses are NOT deductible?
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1.) maintains or improve skills required by individual in his/her employement or other trade/business 2.) meets the express requirements of the individuals employer or the requirements of applicable law or regulation 1.) educatio is required to meet minimum requirements for job 2.) education qualifies taxpayer for a new trade or business
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What are the two taxes applied for SE business? What is theri rates? – what additional rate is imposed for MFJ, MFS, all others
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1.) Social Secutiry Tax–12.4%–limit $117,000 2.) Medicare Tax–2.9%—no limit = Total Tax–15.3% – An additional 0.9% tax is imposed on SE income in excess of : MFJ: $250,000 MFS: $125,000 All Others: $200,000
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How is the final Self Employement tax calcualted? -where do we put this deduction? Where is Self Employement Tax reproted?
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Total SE Rate * (92.35%*SE Income) -this is a FOR AGI deduction, and the deduction is worth ONE HALF of SE tax paid Schedule SE, which MUST accompany any Schedule C.
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