Ch 6 Flashcards
The deduction for charitable contributions, may not exceed…
50% of taxpayer’s AGI
2 categories of deductions for individuals
1 deductions subtracted from gross income to calculate AGI
2 deductions subtracted from AGI to calculate taxable
Income
High income tax payers experience a phase out for 2 things? At what threshold?
Standard deductions and Personal exemptions
$250,000 single, $300,000 married
4 common examples of deductions for AGI?
1 moving expenses
2 alimony paid
3 one half of self employment taxes
4 student loan interest
4 expenditures a taxpayer may not deduct?
1 capital expenditure
2 expense related to tax exempt income
3 illegal or violation of public policy
4 specifically disallowed by tax law
A taxpayer may deduct business or investment expenses if…
It’s a profit of trade motivated activity
The IRC classifies expenses incurred in trade and business as…
2) investment expenses other than those incurred to produce rents and royalties are classified by the IRC as…
Deductions for AGI
2) deductions from AGI
Supreme court’s definition of what constitutes trade or business?
Holding one’s self out to others as engaged in selling goods
Or services
Expenses incurred by an individual in an investment activity, such as researching stocks and other than producing rents or royalties, are considered what kid of deductions?
2) When are they deductible?
Miscellaneous itemized deductions
2) deductible when they exceed 2% of taxpayer’s AGI
Legal and accountings fees
May generally be deducted if incurred for regular conduct
Of trade, business or production of income
Considered: deductions for AGI
Tax payers may not deduct legal fees they incur in connection with…
2) what must they do?
Purchase of property
2) they must capitalize them
Fees for Determination, collection or refund of any tax
Considered deductions from AGI
Personal expenses like legal fees incurred for divorce
Generally aren’t deductible
Tax advice given in incident of divorce qualifies for partial deduction
How is a business or investment expense considered ordinary?
Must be reasonable in amount
bear proximate relationship to income producing activity or property even if it’s not yet profitable
Necessary expense
Appropriate and helpful
Would a prudent businessperson incur same expenditure
Under similar circumstances
Taxpayers may not take a deduction for a loss or expense of…
1 exception?
Another person
May take deduction for medical expenses paid on behalf
Of a dependent, or almost qualifies as dependent
Expenses related to tax exempt income
May not deduct any expenses related or allocated to tax
Exempt income
Debt taken to finance
Depends on intent (mortgage on personal residence can be
Deducted)
Debt taken to by securities can’t be
Political contributions, political advertising and lobbying expenses
Are not deductible
Taxpayers may deduct lobbying expenses incurred to influence legislation on the local level if the legislation is of…
Direct interest to the taxpayer’s business
Business investigation expenses
Expenses tax payer incurs reviewing and analyzing a
Prospective business before deciding whether to acquire
Or create it
Ex. Expenses include: Market surveys, traffic patterns, products, labor supplies, distribution facilities
Costs incurred in connection with issuance if stock or securities…
Where are they charged?
Do not qualify as start up costs
Charged to paid in capital
Preopening AKA startup costs
Expenses incurred after taxpayer decides to acquire or
create Business, but before business activity itself starts
Ex. Training employees, advertising, securing supplies, distributors, potential customers, setting up business’s books and records
In the cash method of accounting, expenses are generally deductible when…
Actually paid
In general a capital expenditure or prepayment of expenses by a cash method taxpayer…
Does not result in deduction if expenditure creates an
Asset having a useful life that extends beyond the close
Of the tax year
Prepaid interest
Deduct prepaid interest expense over period of loan
To which interest charge is allocated
The accrual method taxpayer deducts expenses in…
The period in which they accrue
Items accrue when the transactions meets what 2 tests?
1 all-events test
2 economic performance test
All events test: 2 conditions
1 existence of liability is established
2 amount of liability is determined with reasonable accuracy
Economic performance test
When economic performance occurs is Based on type of transaction
Wash sales
Disallowed losses
Taxpayer sells a stock security and acquires same stock
Security within 30 days after date of sale
61 day period extends to 30 days before date of sale and
30 days after date of sale
Example of substantially identical securities
Bonds that mature within a few months of each other
Basis of stock in wash rule
The loss in the security is deferred
Related parties
1 Individuals and there families
2 individuals and corporations or partnership where individuals own more than 50% of S or C corporation/ or partnership
3 grantor or fiduciary relationship with trust
Related tax payers may not take current deductions on 2
Specific types of transactions
1 losses on sales of property
2 accrued expenses that remain unpaid to related cash
Method taxpayer at end of tax year
Construction ownership rules
Stock owned by other family members or families trust
Is considered owned by individual
When is a rental home considered a residence?
When you live there 10% of rental days and at least 14 days
The term principal place of business…
Includes home office used by taxpayer for administrative and management activities
When is a hobby activity considered a business under tax law?
Gross income exceeds deductions from activity 3 out of 5 consecutive years
