question

What do itemized deductions consist of?

answer

allowable personal expenditures MISC itemized deductions

question

Are itemized deductions FOR or FROM AGI?

answer

The are deducted FROM AGI.

question

What are most itemized deductions subject to?

answer

income limitations

question

Are investment expenses by individuals deductible? If so, how?

answer

Deductible as MISC itemized expenses. (previous question stated that investment related expense (commision) must be added to basis. How can you have both?)

question

What personal expenses are always deducted FOR AGI

answer

Rent Expenses Royalty Expenses Investment Interest Expenses Capital Gains and Losses (not an expense but deductible above the line)

question

Personal expenses that are not rent, royalty, and investments are deducted as what?

answer

MISC itemized deductions subject to the amount that exceeds 2% of AGI (not always true, ask professor) not all below the line deductions are MISC itemized and subject to limitation. Only some are. How do we know which ones?

question

Electing the standard deduction, all tax benefits from itemized deductions are...

answer

lost

question

See example 5 in text book

answer

Practice it.

question

LO2 For conduit entities, what deductions most commonly must be reported to owners separately?

answer

Capital gains Capital losses charitable contributions Investment interest expenses Investment expenses non deductible expenses Sec. 179 expenses

question

Lo3 Can a corporation have expenses classified as investment related expenses?

answer

No. All expenses are classified as trade/business expenses.

question

In general what are the categories of allowable trade and business expenses. (sec. 162)

answer

Reasonable Salaries Traveling expenses Rentals or other payments required to be made as a condition to the continued use or possession of property to which the taxpayer has not taken or is not taking title in in which has no equity.

question

What are the three requirements for meeting the "egaged in a trade or business "test?

answer

Profit motivation Continuous and regular activity livelihood- not a hobby.

question

Rental Activity Expenses is always adjusted

answer

FOR AGI

question

Classification of rental property as trade or business related or investment related depends on what?

answer

Amount of owner activity/involvement

question

Investment rental property sold at a loss is deducted how?

answer

Investment rentals sold at loss are treated as a capital loss and subject to 3000 deduction per year

question

Test for deductibility

answer

Ordinary- normal for similar business Necessary- helpful and prudent Reasonable in amount - arms length - question of fact (what does question of fact mean?)

question

negative test for deductibility Must not be a...

answer

- Personal expense - Capital Expenditure (depreciated and amortized over life of asset.) - Against public policy - Related to tax exempt income - Another person's obligation

question

What is the start up cost deduciton allowed?

answer

5000 in year business becomes operational.

question

What is the $ limit for start up cost deductions?

answer

50,000

question

What happens to excess start up costs for deduciton?

answer

they are amortized over 180 months.

question

What is the phase out limit for start up costs?

answer

dollar for dollar phase out of deduction when start up costs exceed 50,000.

question

Illegal Businesses (against public policy) Are cost of goods sold deductible in an illegal business?

answer

CGS are ALWAYS deductible.

question

What type of business expenses are deductible for illegal businesses?

answer

all ordinary, reasonable, and necessary expenses for all illegal business except the sale of drugs.

question

Against Public Policy When is the only time that costs to influence legislation are deductible?

answer

WHen you are lobbying the local government

question

When are costs to monitor legislation deductible?

answer

always without regard to local, state, federal.

question

Define Hobby

answer

an income earning activity without a predominant profit motive.

question

Factors in determining a hobby

answer

Manner of conducting activity Expertise or reliance on expert advice Time and effort spent on activity History of income and loss Amount of occasional profit Elements of personal pleasure Financial status Success in similar activities

question

Are losses from a hobby deductible?

answer

No.

question

Are expenses from a hobby deductible?

answer

Yes, but limited to the amount of income the hobby generates

question

Describe the 3 tier system used to deduct hobby expenses

answer

1) Allowed as either business or itemized expenses 2) Other expenses that qualify as business expenses 3) Depreciation on asset used. (have no idea what this system means or how to use it)

question

Allowable expenses from Hobbies are deductible for of from AGI?

answer

FROM AGI as MISC itemized deduction subjet to 2% AGI limitation.

question

What is the order that hobby expenses are deducted?

answer

1) those always deductible. (property taxes, mortgage interest, casualty losses) 2) Non depreciation expenses 3) Depreciation

question

Hobby deductions are adjusted ______ AGI and should be treated as ...............?

answer

FROM and MISC Itemized deduction subject to 2% AGI limitation

question

When does Hobbiest have burden of proof that the hobby has profit motive?

answer

If the taxpayer makes profit less than 3/5 years, or 2/7 years for horses.

question

What is the rule that can switch hobby burden of proof to IRS?

answer

Presumptive rule of SEc. 183

question

Define- Mixed use vacation home

answer

Mixed use vacation homes are used by an owner for personal vacations, and also rented to unrelated parties for some portion of the year.

question

How must mixed use vacation homes be classified? (3)

answer

1) personal residence 2) Vacation home 3) Rental Property

question

When is a mixed use vacation home classified as a personal residence?

answer

When it is rented out 14 days or fewer in a year

question

When is a mixed use vacation home classified as a vacation home?

answer

If used personally - by owner more than 14 days in a year or - more than 10% of the number of days rented

question

When is a mixed use vacation home classified as a rental property?

answer

when used by owner 14 days or fewer out of the year or when used by owner less than or equal to 10% of the days rented.

question

If classification is personal residence, tax treatment is?

answer

Report no income

question

If classification is vacation home, tax treatment is?

answer

Report income and allocate expenses using 3 tier system. (no losses allowed)

question

If classification is a rental property, tax treatment is?

answer

Report income and allocate ALL expenses. Losses allowed.

question

What are requirements to designate a portion of the home as a home office?

answer

1) office must be used exclusively and regularly 2) Prinicipal place of business, OR 3) Place to meet clients. (if the home office is not your principal place of business, and you do not meet clients there because you dont have clients, then you will not be disqualified) (surgeon doing admin work)

question

What must employees show in regard to their employer about the use of the office ?

answer

It is for the convinence of the employer required for working with the employer (satellite workers in plano when employer is in cali but doesnt have an office in plano)

question

How are allowable deductions taken with mixed use home offices?

answer

They are taken using the three tiered system.

question

What is the deduction for a mixed use home office limited to?

answer

the amount of net income genereated by the business?

question

Can a home office deduction create a loss?

answer

No, but losses can be carried forward.

question

Timing of Deductions What determines the taxpayers timing of deductions?

answer

The accounting method that they use.

question

Cash method deductions are made when? When are check transactions considered paid? When are credit card transactions considered paid?

answer

in the year the expense is paid. Date of mailing checks date of swipe of credit cards

question

Are prepaid expenses deductible under the cash method of accounting?

answer

If used within one year. (not prepaid interest)

question

When are accrual method deductions taken?

answer

When two tests are met.

question

What are the two tests for determining when accrual based deductions can be taken?

answer

All events test Economic performance test

question

When is all events test met?

answer

When a liability exisists, and the amount of that liability can be determined with reasonable accuracy

question

When is economic performance test met?

answer

When services or property is provided.

question

What is the rule when timing deductions between: an accrual basis taxpayer with accrued expenses payable to a cash basis related taxpayer?

answer

Unless both parties are Accrual basis, both parties must report using the cash method of accounting (great loophole if not limited by IRS) (you could claim lots of expenses now, claim income later)

question

Estimates of expenses are not permitted for tax purposes. Writing off bad debts, you must use a _____ amount? Warranty expenses cannot be _____________?

answer

Use specific write-off for bad debts Do not estimate warranty expense

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