Chapter 6 Flashcards
The courts have held that whether and to what extent deductions are allowed depends on __________.
Legislative Grace
______ are also important in determining the amount of intemized deductions because many itemized deductions are limited to amounts in excess of specified percentages of AGI.
Deductions for AGI
If a deduction is not listed in section 62, it is a/an _____, not a/an _______
deductino for AGI
The Code defines ______ as the deductions allowed other than “the deductions allowable in arriving at adjusted gross income.
itemized deductions
Section 212 expenses related to rent and royalty income are _______
Deductions for AGI
Expenses paid in connection with the determination, collection, or refund of taxes related to the income of sole proprietorships, rents and royalties, or farming operations are ________. All other section 212 expenses are _______
Deductions for AGI
Itemized deductions
Section 162 permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. These incluse reasonale salaries paid for services, expenses for the use of business property, and part of self-employment taxes paid. Such expenses are ________
Deductions for AGI
Section 162 excludes thses from classification as trade or business expenses:
- charitable contributions or gifts
- illegal bribes and kickback and certain treble damage payments
- fines and penalties
A bride paid to a domestic official is ______ if it is illegal under the laws of the United States. F
Not deductible
Foreign bribes are ______ unless they are unlawful under the Foreign Corrupt Practices Act of 1977
Deductible
To be deductible any trade or business expense must be ________ & _________. These terms are found in sectios 162 & 212
ordinary & necessary
An expense is _______ if it is normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature.
Ordinary
The code refers to _______ solely with respect to salaries and other compensation for services. But the courts have held that for any business expense to be ordinary and necessary it must also be this.
Reasonable
_________ of individual taxpayers are limited to those incurred a trade or business or in a transaction entered into for profit.
Deductible losses
Individuals are also allowed to deduct losses that are the result of a ______
Casualty
______ include but are not limited to, those causes by fire, storm, shipwreck, and theft
Casualty losses
________are reduced by $100 per casualty, and the aggregate of all personal casualty losses is reduced y 10% of AGI
Deductible Personal Casualty Losses
A personal casualty loss is a/an ________
itemized deduction
All deduction for and from AGI wind up on page 1 and 2 of______
All deductinos for AGI are reported on _____
The last line of page 1 is ______
Form 1040
Page 1
adjusted gross income
All ______ on page 2 are carried over from Schedule A
itemized deductions
Paid refers to _______who get deductions only in the year of payment.
Incurred concerents the _____ who obtains the deduction in the year in which the liabilty for the expense becomes certain
Cash Basis Taxpayer
Accrual Basis Taxpayer
The expenses of cash basis taxpayerse are _____ only when they are actually paid with cash or other property. Promising to pay or issuing a note does not satisfy the actually pair requirement.
For cash basis taxpayers, the payment can be made with borrowed funds. At the time taxpayers charge expenses on their credit cards, they are allowed to ______. The are deemed to have simultaneously borrowed money from the credit card issuer and constructively paid the expenses.
Claim the deduction
Cash basis and accrual basis taxpayers cannot take a currect deduction for _______ except through amortization, depletion, or depreciation over the life of the asset.
capital expenditures
The payment must be required, not a voluntary prepayment, to obtain the ______. The taxpayer must also demonstrate that allowing it will not result in a material distortion of income
current deduction
The period in which an accrual basis taxpayer can deduct an expense is fetermined by applying these 2 test:
- all events test
- economic performance test
All events test:
all of the events have occurred to create the taxpayer’s liability and the amount of the liabilty can be determined with reasonale accuracy
Economic performance test:
when the service, property, or use of property giving rise to the liabilty is actually performed for, provided to, or used by the taxpayer.
An exceptino to the economic performance requirements allows certain reuccring items to be deducted if the following conditions are met:
- the item is recurring in nature and is treated consistently by the taxpayer
- either the accrued item is not material or accruing it results in better matching of income and expenses
- all of the events have occurred that determine the fact of the liabilty, and the amount of liabilty can be determined with reasonable accuracy
- Economic performance occurs withing a reasonable period (but not later than 8 1/2 months are the close of the taxable year. )
Deductions are disallowed for certain specific types of expenditures that are considered contrary to public policy as follows:
- Bribes and Kickbacks
- Fines and penalties paid to a government for violation of law.
- 2/3 of the treble damage payments made to claimants resulting from violation of the antitrust law
Legal fees incurred in connectino with a criminal defense are ______ only if the crime is associated with the taxpayer’s trade or business or income-producing activity.
deductible
Deductible legal expenses associated with the following are deductible for AGI:
- Ordinary and necessary expenses incurred in connection with a trade of business
- Ordinary and necessary expenses incurred in conjunction with rental or royalty property held for the production of income
All other deductible legal expenses are
Deductible from AGI
The usual expenses of operating and illegal business are ______. However, Sectoin 162 disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments
deductible
An exception applies to expenses incurred in illegal trafficking in drugs. Drug dealers are _______ a deduction for ordinary and necassary business expenses incurred in their business. In arriving at gross income from the business, however, dealer may reduce total sales by the cost of goods sold.
not allowed
Political Contributions and Lobbying Expenditures are ______
not deductible
Lobbying expenses incurred in attempting to influence state or Federal legislation or the actions of certain high-ranking public officials are _______
Not deductible
Three exceptions to the disallowance of lobbying expenses
- an exception is provided for influencing local legislation
- the disallowance provision does not apply to activities devoted soley to monitoring legislation
- a de minimis exception is provided for annual in-house expenditures, if these expenditures for not exceed $2,000. If the in-house expenditures exceed $2000, none of the in-house expenditures can be deducted
The millionaires’ provision limits the amount the employer can deduct for the compensation of a covered executive to ________ annually
one million
Employee compensation excludes:
- commissions based on individual performance
- certain performance-based compensation based on company performance according to a formula approved by a board of directors compensation commitee and by shareholder vote. The performance attainment must be certified by this compensation committee.
- Payments to tax-qualified retirement plans
- Payments that are excludible from the employee’s gross income
_______ are expenses paid or incurred to determine the feasibilty of entering a new business or expanding an exisiting business
Investigation expenses
If the taxpayer is in a business that is the same as or similar to that being investigated, all investigation expenses are ______ in the year paid or incurred. The tax result is the same whether or not the taxpayer acquires the business being investigated.
deductible
When the taxpayer is not in a business that is the same as or similar to the one being investigated, the tax result depends on whether the new business is aquired. If the business is not acquired, all investigation expenses are ________. If the business is acquired, the expenses must be _______ as start up expenses.
Nondeductible
Capitalized
When capitalizing the startup, the taxpayer can elect to have the first $5,000 of the expenses can be _______. Any excess can be _____ over a period of 280 months. In arriving at the $5,000 immediate deduction allowed, a dollar-for-dollar reduction must be made for those expenses in excess of $50,000.
Immediately deducted
amortized
Business or investment expenses are ______ only if the taxpayer can show that the activity was entered into for the purpose of making a profit
deductible
While personal losses are ________, losses attributable to profit-seeking activitive are ______ and used to offset a taxpayer’s other income.
not deductible
deductible
If an individual can show that an activity has been conducted with the intent to earn a profit, losses from the activity are _______.
fully deductible
Hobby expenses are deductible only to the _______
extent of hobby income
The code provides a rebuttable presumption that an activity is ______ if the activity shows profit in a least three of any five prior conservative years. If the activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rules. If these profitability tests are met, the activity is presumed to be _____ rather than a personal hobby.
Profit-seeking
Trade or business
If an activity is deemed to be a hobby, the expenses are deductible on the the extent of ________. Theses expenses must be deductible in this order:
The gross income of the hobby
- Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest.
- Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted bais. (include maintenence, utilities, and supplies )
- Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit. (include depreciation, amortization, and depletion.)
Hobby losses deductions are deductible _____ to the extent they excees 2% of AGI.
From AGI
*If the taxpayer uses the standard deduction rther than itemizing, all hobby loss deductions are wasted.
If the residence is rented for fewer than 15 days in a year, it is treated as a _______. The rent income is _______. and mortgage interest and real estate taxes are allowed as _______.
Personal Residence
excluded from gross income
itemized deductions
*no other expenses are deductible
If the residence is rented for 15 days or more in a year and is not used for personal purposes for more than the greater of 14days or 10% of the total days rented, the residence is treated as _______. The expenses must be allocated between personal and rental days if there are any personal use days during the year. The deduction of the expenses allocated to rental days can _______ and result in a rental loss. The loss is _______, subject to the at-risk and passive activity loss rules.
rental property
exceed rent income
deductible
If the residence is rented for 15 days or more in a year and is used for personal purposes for more than the greater of 14 days or 10% of the total days rented, it is treated a _______. The expenses must be allocated between personal days and rental days. Expense are allowed only to the ______. If a residence is classified as a personal/rental use property, the expenses that are deductible anyway must be ______. Expenses must be allocated between personal and rental days before the limits are applied. The courts have held that real estate taxes and mortgge interest, which accrue ratably over the year, are allocated o the basis of 365 days.
Other expense are allocated on the basis of total days used.
personal/rented residence
extent of rent income
deducted first
Taxes and interest are computed using days rented over 365 for _____ the rest is over the total days used.
Court’s approach
To be deductible, an expense must be incurred _______. An individual cannot claim a _____ for the payment of the expenses of another individual.
for the taxpayer’s benefit or arise from the taxpayer’s obligation
tax deduction
One exception to this disallowance rule is the payment of ______ for a dependent. Such expenses are deductible by the payor subject to the normal rules that limit the deductibility of medical expenses.
Medical Expenses
The regulations further define capital expenditures to include those expenditures that ________. Incidental repairs and maintence of the property are not capital expenditures and can be deducted as ordinary and necassary business expenses.
add value or prolong the life of property or adapt the property to a new or different use.
When an expenditure is _______ rather than expensed, the deduction is at best deffered and at worst lost forever. Although an immediate tax benefit for a large cash expenditure si lost, the cost may be ______
Capitalized
deductible in increments over a longer period of time.
If the expenditure is for a tangible asset that has an ascertainable life, it is ______ and _______
capitalized
may be deducted as depreciation over the life of the asset or over a statutory period.
If the expenditure is for an intangible asset, the capitalized expenditure _____
can be amortized regardless of whether the intangible asset has an ascertainable life.
Section 197 intangible assets are amortized over a 15 year statutory period using ______
Straight line
The Code provides for the disallowance of any “losses from sales or exchanges of property…. directly or indirectly” between related parties. When the property is subsequently sold to a nonrelated party, any gain recognized is _____.Any disallowed loss not used by the related-party buyer to offset the recognized gain on a subequent sale or exchange to an unrelated party is permanently lost.
reduced by the loss previously disallowed.
Related parties are created by _____
brith
marriage
business
Related parties include:
- Brothers/Sisters, spouse, ancestors, and lineal descendants
- A corporation owned more than 50% by the taxpayer
- Two corporations that are members of a controlled group
- A series of other complex relationships between trusts, corporations, and individual taxpayers
Nonreimbursed expenses _____
Reimbursed Expenses ______
From AGI
For AGI
