Business Expenses Flashcards
When are mixed business and personal outlays allowed to be deducted?
Deductions claimed by a taxpayer is only allowable if their motivation (intent) in investing in the business is to make a profit.
Cannot deduct for a habit.
What factors do courts look at to determine the intent of the taxpayer?
• Numerous factors to consider the intent of the taxpayer:
○ Manner in which the taxpayer carries on the activity
○ The expertise of the taxpayer or his advisors.
○ The time and effort expended by the taxpayer in carrying on his activity.
○ Expectation that assets used in activity may appreciate in value.
○ The success of the taxpayer in carrying on other similar or dissimilar activities.
• Greater weight is given to objective facts than just the taxpayers statements.
Who has the burden of proof for whether an expense is business or personal?
§ 183(d) - if gross income derived from an activity for 3 or more of 5 consecutive years which ends at the taxable year exceeds the deductions attributable to the acticity, then it is presumed to be an activity engaged in for profit. If not, then the burden shifts to the taxpayer.
When can home offices and be deductible?
Generally no deduction for home business use. Must have an exception annotated later in the section.
• Deductions for home offices are only allowed if it is the “principle place of business for any trade or business of the taxpayer”,
○ Office must usually be the actual business location. If the taxpayer has an office where he conducts business, even if most of the time is spent at the home office, it may not be deductible.
• A place of business which is used by clients meeting with the taxpayer in the normal course of his trade or business, or
• A separate structure, not attached to the dwelling unit, used in connection with the taxpayer’s trade or business.
What is a Subchapter S corporation and what is the tax benefit?
must have a limited amount of shareholders. Income tax “passes through” to the shareholders.
When can vacation homes be deducted?
If used by the taxpayer, the taxpayer can only deduct annual depreciation and maintenance for the percentage of time it was rented to other people.
• E.g. - if taxpayer stayed in the house for 5 days, and rented it out for 95 days, then only 95% of the allowed maintenance and deduction for the year can be deducted. Only applies if the taxpayer used the property less than 15 days.
• If taxpayer uses the home for 15 days or more, or more than 10% of the number of days it was rented, then it is considered as a residence and no maintenance and depreciation may be deducted.
What is the two prong test to determine if a home office can be deducted?
Violin player case.
Relative importance - Where the goods and services are delivered. Court distinguished this from a professional musician due to the importance of practice time as essential to her trade.
Time spent - nearly a 5 to 1 ratio of time spent at home practicing to time performing was important to her abilities to perform as a professional.
What is the difference between a investor and a trader?
investors managing their own stocks for long-term gains, as opposed to traders who continually buy and sell stocks in the market for mainly short-term gains.
A taxpayer who merely manages his investments seeking long-term gain is not carrying on a trade or business.
What types of business expenses are deductible?
- § 163 allows a deduction for all the “ordinary and necessary” expenses paid or incurred during the taxable year in carrying on any trade or business.
- No deduction for personal living or family expenses (§ 262).
What is the general rule for business expenses?
General Rule is there is a deduction for all ordinary and necessary business expenses, paid during the taxable year in carrying on or any trade or business.
How are entertainment expenses for business treated?
generally disallows business deduction for entertainment.
• 274(h) - conventions, seminars, or similar meetings are not deductible unless he taxpayer established that the meeting is directly related to the active conduct of his trade or business.
• Travel (§ 162(a)(2)) - away from home in pursuit of your trade or business. Includes hotel expenses.
○ “other than amounts which are lavish or extravagant under the circumstances”
• Meals -
• Entertainment (shows) -
○ Meals and entertainment are limited to 50% of the cost.
• Spouse - to include expenses paid for a spouse’s attendance, there must be a bonafide business purpose for going on the trip
What happens if an entertainment expense is not used (ticket purchased but nobody goes)?
Not deductible
Is parking for work allowed as a deduction?
Parking is not allowed as a deduction unless personal transportation is required.
• If public transportation is available, then a personal vehicle is not required.
What is the test for clothing expenses for business?
Not deductible if the clothes could be worn on a day-to-day business.
Objective test - no reference made to the taxpayer’s lifestyle or personal taste. Adaptability for personal or general use depends upon what is generally accepted for ordinary streetwear.
How are legal expenses treated?
• The characterization, as “business” or “personal”, of the litigation costs of resisting a claim depends on whether or not the claim arises in connection with the taxpayer’s profit-seeking activities. It does not depend on the consequences that might result to a taxpayer’s income-producing property from a failure to defeat the claim. U.S. v. Gilmore
○ Cannot deduct legal expenses incurred to protect income-producing property unless the litigation arises in connection with the business.
