Chapter 6 In Class Notes Flashcards
Is it better to have deductions for AGI or from AGI
For AGI because it lowers the AGI and if the AGI is lower than the standard deduction there’s no tax. And things are based off of the percentage above the AGI. Percent above AGI is deductible.
What are 3 types of For AGI deductions
Business expenses
investment expenses
Misc
To qualify as Business Expenses it must meet 3 requirements
Ordinary - normal, usual, and customary
Necessary - appropriate and helpful
Reasonable - solely with respect to salaries and other compensation
for services.
An accrual of expenses for tax purposes has to meet 3 tests.
- The Liability must be a fixed amount
- The liability can be determined accurately
- The expenditure must be connected to a service that is actually provided to a customer/taxpayer.(Economic Performance test)
Says before you can accrue an expenditure under the accrual method of accounting you must provide the services to the customer.
Economic Performance test
If you pay a lobbyist to monitor legislation. Is it deductible
It is completely deductible.
If you pay a lobbyist to influence and change the legislation is it taxable.
If it’s less than 2,000 it is deductible. If it’s greater it is taxed.
If a computer manufacturing business spends 50,000 on deciding if they should expand to manufacturing in Wyoming. Is it deductible.
Yes it is because it’s research on if they should manufacture.
If a computer manufacturing business spends 50,000 on deciding if they should expand and retail furniture in wyoming would it be deductible.
No it is nondeductible because it doesn’t pass the Business Expense requirements
What determines if it’s a business or a hobby
What amount of personal satisfaction does it give. What’s the nature of the experience. How much money do they make.
3 Kinds of structures you can have for vacation homes
- Rental Home/Property
- Second Residence
- Vacation home
The only thing you can deduct for Second Residence (a home in Vegas or somewhere where you visit once in a while) is?
Interest expenses and property taxes as itemized deductions
If you have rental home/property you can deduct what..
Revenue - expenses = NOI
If you rent the home sometimes and live there sometimes it turns into?
vacation homes.
What can you deduct?
Revenue - interest expenses - Operating expenses - dependency exemptions =
How to determine if it’s vacation home, second home, or rental home/property
Depends on the time they live in it.
If the residence is rented for fewer than 15 days in a year, it is treated as a
personal residence or second residence. The rent income is excluded from gross income, and mortgage interest
and real estate taxes are allowed as itemized deductions, as with any personal residence.
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 (1) 14 days or (2) 10 percent of the total
days rented, the residence is treated as
rental property. 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 exceed
rent income and result in a rental loss. The loss may be deductible, subject to the
at-risk and passive activity loss rules (discussed in Chapter 11
If you paid for a car in cash for your business is the expenses all deductible that year.
No it has to be defferred because the useful life is more than 1 year. It’s a capital asset.
You can never deduct losses on the sale of personal use asset?
True
You can deduct losses on sale of business assets?
True
Are losses on sale of personal use assets deductible.
No
If you pay your kids too much from your corporation what happens to the income given to the kids.
It’s not ordinary, reasonable and the other one so it’s taxed as if it was given to the parents as a dividend so it’s still taxed twice.
- LO.2 Maud, a calendar year taxpayer, is the owner of a sole proprietorship that uses
the cash method. On February 1, 2012, she leases an office building to use in her business
for $120,000 for an 18-month period. To obtain this favorable lease rate, she pays
the $120,000 at the inception of the lease. How much rent expense may Maud deduct
on her 2012 tax return?
Maud can deduct $120,000 in 2012 for the rent for February 2012 through July 2013. She does qualify under the one-year rule for prepaid expenses since the period for which prepayments have been made does not extend past December 31, 2013. Example 8
A guy on the accrual method had a rock concert and got gross receipts of 300,000. The cleanup was next year. So the entertainment and food happened in year 1 and the cleanup happened in year 2. How are the expenses incurred
The food and entertainment costs will be taxed in year 1 and the cleanup costs are taxed in year 2. This is not prepaid expense, it’s a normal expense.
On last question if you used cash method and paid for everything in year 1, how would it be taxed?
They would be expensed the same way as accrual because even though it’s cash method the expense is deferred to year 2. Even though it’s a prepaid expense now. Exception is if it’s a reoccurring expense
For publicly traded corporations, the maximum compensation that is deductible is
a million dollars for the CEO and the top 4 most highly paid executives. Performance paid bonuses are not subject to this 1 million dollar rule.
Terry spends 52,000 investigating to expand his hardware business. He doen’t ever expand eventually. Is the 52,000 deductible?
Yes
What about if he did get the stores?
Yes it’s deductible.
What if he expands into another type of business?
Not deductible.
Do Question 49
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