Chapter 6 - Deductions and Credits

Question 1

What is section 62?

Answer 1

Deductions for AGI

Question 2

Items that are classify as deduction for AGI?

Answer 2

1. Trade or business expense
2. Deduction for payment of alimony
3. Deduction for part of self-employment tax paid by a self-employed taxpayer.(50% can be deducted)
4. Deduction for medical insurance premiums paid by a self-employed taxpayer for coverage of spouse, and any dependents. (deduct to extent you have income)
5. Certain contributions to pension, profit sharing, and annuity plans of self employed individuals.
6. Deduction for certain retirement savings allowed by section 219 (only contribution to traditional IRA, Limited to 5,500 contribution and deduction)
7. Deduction for moving expenses. (deduct the difference between expense and reimbursed amount.
8. Interest paid on student loans
9. Qualified tuition and related expenses under section 222. (take a tax credit or get a deduction)
10. The deduction up to $250 for teacher supplies for elementary and secondary school teachers.

Question 3

What is itemized deduction?

Answer 3

From AGI deduction, if not classify as for AGI then it is classify as itemized deduction.

Question 4

What is section 212 expense?

Answer 4

Allows deductions for ordinary and necessary expenses paid or incurred by an individual under (3) conditions. Can deduct as itemized.

Question 5

What are the (3) conditions to deduct ordinary and necessary expense under section 212 as itemized deductions?

Answer 5

1. The production or collection of income. (investment fees)
2. The management, conservation, or maintenance of property held for the production of income.
3. Expenses paid in connection with the determination, collection, or refund of any tax. ( tax preparation fee, CPA, some subj to limitation)

Question 6

List 2 deductions for AGI in section 212.

Answer 6

1. Expenses related to rent and royalty income
2. Expenses paid in connection with the determination, collection, or refund of taxes related to the income of sole proprietorship, rents and royalties, or farming operations.

Question 7

Deductible personal expenses as iteminzed

Answer 7

Include charitable contribution, medical expenses, certain state and local taxes the greater of state or sales taxes paid, personal casualty losses (subtract $100 per casualty, excess of 10% AGI)
certain personal interest.

Question 8

Trade or Business Expense and Production of Income Expense

Answer 8

Section 162 state that you can deduct ordinary and necessary expenses generally for AGI “sch c”

Question 9

Section 162 excludes the following items from classification as trade or business expense

Answer 9

1. Charitable contributions or gifts
2. Illegal bribes and kickbacks and certain treble damage payments.
3. Fines and penalties (for violation of gov. law)

Question 10

To deduct business expense the expense must be?

Answer 10

ordinary, necessary, and reasonable

Question 11

What is an ordinary expense?

Answer 11

Expense that some other business in same industry is expected to incur

Question 12

What is an necessary expense?

Answer 12

Expense that are both helpful and appropriate to run the business.

Question 13

Reasonableness requirement

Answer 13

Commonly dealing with compensations of executives. Business expense to be ordinary and necessary, it must also be a reasonable amount. Expense related to travel and meals that most people tend to take advantage of.

Question 14

Business and Non-business Losses

Answer 14

Most business loss are deductible. if you are a passive owner (not actively managing the business) you may not deduct your losses. Also allowed to deduct losses that are the result of casualty.

Question 15

Personal casualty losses are subject to?

Answer 15

damages less insurance reimburse are then reduced by $100 per casualty, and the total personal casualty loss is reduce by 10% of AGI. (Certain losses not compensated by insurance company can be deducted).

Question 16

What kind of deduction is a personal casualty loss?

Answer 16

itemized deduction

Question 17

Form 1040, Page 1

Answer 17

Income from all sources
Less: Deductions for AGI (from list)
Equals: AGI

Question 18

Form 1040, Page 2

Answer 18

AGI
Less: Std Deduction or itemized deductions
Less: Exemptions
Equals: TI

Question 19

Schedule A

Answer 19

Itemized deductions
Medical expense
taxes
interest
charitable contributions
casualty loss
misc itemized deductions
Equal: Total itemized deductions

Question 20

Schedule B

Answer 20

Interest and Dividends

Question 21

Schedule C

Answer 21

Business Income

Question 22

Schedule D

Answer 22

Capital gains and Losses

Question 23

Schedule E

Answer 23

Rent, Royalties, etc.

Question 24

Schedule F

Answer 24

Farm Income

Question 25

Public policy limitation, justification for denying deductions.

Answer 25

What government say is legal and illegal. If government does not allow an action, then IRS will not allow deduction based on action.

Question 26

Deductions are disallowed for certain specific type of expenditures

Answer 26

1. Bribes, kickbacks, and treble

2. Fine and penalties paid to a government for violation of the law

Question 27

Treble payment deductions

Answer 27

1/3 is deductible (ex. payment of 1,000. court triple payment to 3,000)

Question 28

Legal expenses incurred in defense of civil or criminal penalties

Answer 28

If expense was related to a trade or business, rent and royalties, deduct for AGI. If expense was related to an effort to collect income then it is an itemized deduction (legal fee). Personal legal expenses are not deductible

Question 29

Deductible legal expenses associated with the following are deductible for AGI

Answer 29

1. Ordinary and necessary exp incurred in connection with a trade or business.
2. Ordinary and necessary exp incurred in conjunction with rental or royalty property held for production of income.

Question 30

Expenses relating to an illegal business

Answer 30

Report all ordinary and necessary expenses relating to illegal business. Exception, drug dealers are only allow to deduct COGS.

Question 31

Lobbying expenditures

Answer 31

Lobbying expense are not allowed. Contribution to a lobbyist or being a lobbyist is not deductible.

Question 32

Egret Company pays 10,000 annual membership fee o the free trade group, a trade associated for plumbing wholesalers. The trade association estimates that 70% of its due are allocated to lobbying activities.

Answer 32

The portion going into the non-lobbying activities is deductible. 10,000 * 30% = 3,000

Question 33

Excessive executive compensation

Answer 33

IRS monitor this and corp return must list out all names and amount. Plus limitation to avoid excessive.

Question 34

What is start up cost vs organization cost?

Answer 34

Start up cost is cost incur to look up weather to start a business (land survey, market). Organization cost is cost to organize the company (lawyer fees)

Question 35

Are start up cost deductible if taxpayer is entering into the same business?

Answer 35

Yes, it is deductible whether or not the taxpayer opens the business.

Question 36

Are start up cost deductible if taxpayer is entering into a new line of business?

Answer 36

If taxpayer open the business, they can elect to expense up to 5,000 of start up cost. The remaining is amortized over 15 years (180 months). If start up cost is > 50,000. then 5,000 is reduced by the difference over 50,000. If taxpayer does not open the business then it is not deductible.

Question 37

Tina owns and operates 10 restaurants located in various cities throughout the southeast. She travels to Atlanta to discuss the acquisition of an auto dealership. In addition, she incurs legal and accounting costs associated with the potential acquisition. After incurring total investigation costs of 52,000, she acquires the auto dealership on Oct 1,2013

Answer 37

1. 52,000-50,000 = 2,000
2. 5,000 - 2,000 = 3,000 to expense
3. 52,000 - 3,000 expense = 49,000 left to amortize over 180 months.
4. 49,000 / 180 months * 3 month = 817
5. total expense = 3,000 + 817 = 3817
   2014:

Question 38

Distinguish the difference between a hobby and a business

Answer 38

hobby is something you do for pleasure, fun, and fulfillment. A business is profit operating business. Cannot deduct hobby losses only business losses. (entity has been profitable 3 of last 5 years, 2 of last 7 years relating to horses.

Question 39

General rules of hobby losses

Answer 39

treated case by case “fact and circumstances” . 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.

Question 40

Rental of vacation homes

Answer 40

Deduction depend on number of days rental and number of days used for personal purposes.

Question 41

Primarily personal use

Answer 41

If residence is rented for less than 15 days, do not include as rental income. cannot deduct any expenses.

Question 42

Primarily rental use

Answer 42

rented for 15 days or more and use personally no more than the greater of 1)14 days or 2) 10 percent of total days rented. would be rental income and report all expenses and possibility to deduct as rental loss.

Question 43

Personal/Rental use

Answer 43

rented for 15 days or more and is used for personal purposes for more than the greater of 1) 14 days or 2) 10 percent of the total days rented. Expense is allocated between personal days and rental days. If not able to deduct loss. then carryover next year. % rented, % use personally cannot create a loss. same concept as hobby expense.

Question 44

Expenditures incurred for taxpayer’s benefit or taxpayer’s obligation

Answer 44

Only deduct expense incur for your benefit. exception to this disallowance rule is the payment of medical expenses for a dependent.

Question 45

Disallowance of personal expenditures

Answer 45

You are not allowed to deduct for personal, living, or family expenses. Only specific item granted by the IRS.

Question 46

Disallowance of deductions for capital expenditures

Answer 46

Asset get capitalize, subject to depreciation expense over time.

Question 47

Substantiation requirements

Answer 47

You must provide some type of support (documents) or it is a fraud. This relates to all deductions you report.