Chapter 6 - Deductions and Losses (General)

Question 1

What gives you a greater benefit? for AGI or from AGI

Answer 1

For AGI, because the lower the AGI, the lower your limitations will be on some from AGI deductions

Question 2

Section 62 purpose:

Answer 2

Classify various deductions as “for AGI”

Question 3

Expenses attributable to a trade/business carried on by the taxpayer. This does not include services by the taxpayer as an employee.
(type of deduction and where on return)

Answer 3

For AGI
Schedule C
Form 1040 pg1

Question 4

Deduction for payment of alimony

type of deduction and where on return

Answer 4

For AGI

Form 1040 pg 1 at bottom

Question 5

Deduction for part of the self-employment tax paid by a self-employed tax payer.
(type of deduction, where on return, limitation)

Answer 5

For AGI
Form 1040 pg1 at bottom
50% can be deducted

Question 6

Deduction for medical insurance premiums paid by a self-employed taxpayer for coverage of taxpayer, a spouse, and any dependents.
(type of deduction and where on return, limitation)

Answer 6

For AGI
Form 1040 pg1 at bottom
Can only deduct to the extent that business made income. If loss, then do not deduct.

Question 7

Certain contributions to pension, profit sharing, and annuity plans for self-employed individuals.
(type of deduction and where on return)

Answer 7

For AGI

Form 1040 pg1 at bottom

Question 8

The deduction for certain retirement savings allowed by Section 219
(type of deduction, where on return, limitations)

Answer 8

For AGI
Form 1040 pg1 at bottom
limited to traditional IRAs
limited to $5,500

Question 9

Deduction for moving expenses

type of deduction, where on return, limitations

Answer 9

For AGI
Form 1040 pg1 at bottom
limited to the non-reimbursed portion

Question 10

Deduction for interest paid on student loans

type of deduction and where on return

Answer 10

For AGI

Form 1040 pg1 at bottom

Question 11

Deduction for qualified tuition and related expenses under Section 222
(type of deduction and where on return)

Answer 11

For AGI

Form 1040 pg1 at bottom

Question 12

Deduction for teacher supplies for elementary and secondary school teachers
(type of deduction, where on return, limitations)

Answer 12

For AGI
Form 1040 pg1 at bottom
Limited to $250

Question 13

Section 212 Expenses

Answer 13

From AGI (Itemized unless specified)
Deductions for Ordinary/Necessary expenses paid by individuals for the following:
1) production/collection of income (investment fees)
2) mgmt, conservation, or maint. of property held for production of income
3) Expenses paid in connection with the determination, collection, or refund of any tax (tax preparation fees)

Question 14

Expenses related to rent/royalty income

type of deduction, where on return

Answer 14

Section 212
For AGI
Schedule E pg1
1040 pg 1

Question 15

Tax prep fees associated with income from sole proprietorships, Rent/Royalties, and Farming operations

Answer 15

Section 212
For AGI
Sole Proprietorships (Schedule C)
Rent/Royalty (Schedule E)
Farming (Schedule F)

Question 16

Deductible Personal Expenses

type of deduction, where on return, limitations

Answer 16

1) Charitable contributions
2) Medical Expenses (XS of 10% AGI)
3) Property Tax
4) Greater of State Income Tax or State sales tax
5) Personal casualty losses (each casualty minus $100 and the aggregate over 10% AGI)
6) Mortgage interest

All are From AGI
Schedule A
Form 1040 pg2

Question 17

Personal Casualty Losses

Answer 17

From AGI
Schedule A
Form 1040 pg2
[SUM:(Each casualty - $100)] - 10%AGI = deduct.

Question 18

Medical Expenses

Answer 18

From AGI
Schedule A
Form 1040 pg2
Expenses - 10%AGI = deduction

Question 19

Charitable Contributions

Answer 19

From AGI
Schedule A
Form 1040 pg2

Question 20

Property/Estate Tax

Answer 20

From AGI
Schedule A
Form 1040 pg2

Question 21

State Income Tax

Answer 21

From AGI
Schedule A
FOrm 1040 pg2
If state sales tax is greater then use it instead

Question 22

Mortgage Interest

Answer 22

From AGI
Schedule A
Form 1040 pg2

Question 23

Section 162

Answer 23

• For AGI
• Allows the deduction of trade expenses that are ordinary and necessary.
• Exclusions:
  1) Charitable contributions/gifts
  2) Illegal bribes and kickbacks on certain treble dmg pmts
  3) Fines and penalties for violation of govt law
• Requirements: ordinary, necessary, and reasonable

Question 24

Ordinary and Necessary Requirement

Answer 24

Ordinary - expenses that are normal, usual, or customary in the type of business conducted
Necessary - expenses that would be incurred by other prudent businesspersons and is expected to be appropriate and helpful in the taxpayers business

Question 25

Reasonableness Requirement

Answer 25

Salaries and other compensation for services must be reasonable.

Question 26

Business Expenses
(where on return)

Answer 26

Schedule C

1040 pg1

Question 27

Farming Expenses
(where on return)

Answer 27

Schedule F

1040 pg1

Question 28

Form 1040 page 1

Answer 28

• Income from all sources
• Less: For AGI Deductions:
  
  • Trad. IRA
  • Keogh Retirement Plans
  • Alimony
  • Moving expenses
  • Student Loan Interest
  • Penalty on early w/d from savings
• Equals: AGI

Question 29

Form 1040 page 2

Answer 29

• AGI
• Less: Std or Item. Deductions
• Less: Exemptions
• Equals: Taxable Income

Question 30

Schedule B

Answer 30

Interest and Dividends

feeds into 1040 pg1

Question 31

Schedule C

Answer 31

Business Income

feeds into 1040 pg1

Question 32

Schedule D

Answer 32

Capital Gains and losses

feeds into 1040 pg1

Question 33

Schedule E

Answer 33

Rents/Royalties

feeds into 1040 pg1

Question 34

Schedule F

Answer 34

Farming income

feeds into 1040 pg1

Question 35

Schedule A

Answer 35

All itemized deductions:
-charitable contributions
-medical expenses
-interest
-taxes
-casualty losses
-misc. itemized
EQUALS: Total Itemized Deductions
feeds into 1040 pg2

Question 36

Form 4952

Answer 36

Investment interest

feeds into Sch. A

Question 37

Form 8283

Answer 37

Non-cash Charitable Contributions

feeds into Sch. A

Question 38

Form 4684

Answer 38

Casualties and Thefts

Feeds into Sch. A

Question 39

Form 2106/2106EZ

Answer 39

Employee Business Expenses

Feeds into “Misc itemized expenses” on Sch. A

Question 40

Public Policy Limitation

Answer 40

If the government doesn’t allow it, they the IRS will not allow a deduction.
Disallowed deductions:
1) bribes and kickbacks including those associated with Medicare or Medicaid
2) Fines and penalties paid to a government for violation of a law
3) 2/3 of the treble damage payments made to claimants resulting from violation of the antitrust law.

Question 41

For AGI Legal Expenses

Answer 41

For AGI if:

• ordinary and necessary to trade/business
• ordinary and necessary to rent/royalty property used to produce income
• related to tax prep for Sch. C and E

Question 42

From AGI Legal Expenses

Answer 42

From AGI if:

• collection of tax refund
• assoc. with an increase in income
• not specified as For AGI

Question 43

Expenses related to Illegal business

Answer 43

Usual expenses of running an illegal business are deductible.
Exception: Drug dealers can only deduct CoGS

Question 44

Political Contributions and Lobbyist Expenses

Answer 44

Not Deductible

Question 45

Start Up costs / Investigation

Answer 45

1) investigate similar business to one you are in: costs are deductible
2) investigate a dissimilar business and decide to start new business: expense up to $5000 and amortize rest over 180 Months (if start up casts are greater than $50,000 then reduce the $5,000 expense for first year by that amount)
3) investigate dissimilar business and don’t start it up: no deduction

Question 46

Tina owns and operates 10 restaurants. Investigates an auto dealership. She acquires the auto dealership with cost of $52,000 on 10/1/12. What’s her expensed amount for 2012?

Answer 46

52,000 - 50,000 = 2,000
5,000 - 2,000 = 3,000 first year expense
52,000 - 3,000 = 49,000 to be amortized
49,000/180 mos. x 3 mos. = $817 2012 amort.
3,000 + 817 = $3,817 expense in 2012

Question 47

Hobby Losses

Answer 47

• Generally not deductible
• If intent was to generate income, then could be business expense
• Considered a business If:
  1) profit in 3 of last 5 years
  2) Profit in 2 of last 7 years regarding horses
• If considered a business, then burden of proof shifts to the IRS to to prove it’s not a business

Question 48

Deduction order from Hobby losses

Answer 48

From AGI
Losses - 2%AGI = Deduction
Expenses are based on % of assets used for the hobby. (10% home used, then 10% prop. tax, etc.)
1) normal deductions that would take place regardless (deducted in full)
2) Ordinary and necessary business expenses unrelated to capital assets (limited to XS over 2%AGI)
3) Depreciation, Amortization, Depletion (limited to XS over 2%AGI)

Question 49

Categories of Rental Property

Answer 49

1) Primarily Personal
2) Primarily Rental
3) Personal/Rental

Question 50

Primarily Personal Rental

Answer 50

• Less than 15 days rented per year
• rent income is excluded from Gross Income
• Mortgage interest/Real Estate tax are itemized as normal

Question 51

Primarily Rental

Answer 51

• Rented for 15 days or more
• Personal use for no more than the greater of:
  1) 14 days
  2) 10% total days rented
• Allocate expenses between personal and rental days during the year
• Deduction of the expenses allocated to rental days can exceed rent income and create loss. The loss would be deductible.

Question 52

Personal/Rental Property

Answer 52

• Rented for 15+ days and
• Used for personal for the greater of:
  1) 14 days
  2) 10% rented days
• Expenses are allocated between rental and personal days in the year.
• Deduction of expenses allocated to rental can NOT create a loss.

Question 53

Disallowance of Deductions for Capital Expenditures

Answer 53

On capital expenditures, you deduct over time similar to depreciation

Question 54

Substantiation Requirement

Answer 54

For every deduction that you claim, you should have support for. (documentation)