Chapter 8 - Other Deductions, Penalties, Loss Disallowances, and Tax Credits

Question 1

Public Policy Limitation

Answer 1

Activities that violate public policy are not deductible.

Question 2

Political Lobbying Expenditures

Answer 2

Not deductible.

Question 3

Excessive Executive Compensation

applies only to publicly traded companies

Answer 3

CEO, CFO, 3 highest paid
up to $1M of compensation is deductible.

Does not include:
performance pay
commission
retirement contributions

Question 4

Hobby Activities

Answer 4

Activities not entered into for-profit.
Personal pleasure.

Should not be profit motivated.

Presumption that profit motive is certain requirements are met.
- 3 of 5 year there is profit

Question 5

Hobby Activities Taxed

Answer 5

Income is counted.

No deductions counted.

Question 6

Rental Real Estate

Answer 6

1) Non-taxable rental use
- if property is rented for less than 15 days, income is realized but not recognized. Ex. rent my lake home for 7 days for $20k. Pay no tax on $20k.

2) Primarily Rental Use
- Rented more than 14 days. Personal use is less than 12 days or 10% of rental days.
* income is recognized.
* expenses are deductible.
* loss claim may be limited by passive activity rules.

3) Mixed Use:
if rented for 14 or more days and personal use is greater than 14 days or 10%of rental day.
*Income recognized.
* expenses deductible to extend of income.
*Tier rules from hobby loss apply.
* Unused expenses can carry over.

Question 7

Business bad debt:

Answer 7

• only deductible if accrual method of accounting is used.
• req. to use specific charge-off method in year the debt becomes worthless.
• some business can use the reserve method.

Question 8

Personal bed debt:

Answer 8

• Specific charge off method must be used.
• Allowed only when debt is wholly worthless.
• Treated as short term capital loss.
• Related person debts are suspect and treated as gifts.

Question 9

Worthless Securities

Answer 9

• artificial sale date can be used as day security became worthless.

For individuals this is 12/31 to result in long term capital loss.

Question 10

Section 1244 Stock

small business enterprise

Answer 10

Classification:

• it is held by original purchaser
• The initial capitalization of the company was $1M or less.

If sold at a loss:

• First 50k or 100k for MFJ is treated as ordinary income.
• Excess losses for the year follow normal capital loss rules.

Question 11

Personal Losses

Answer 11

Generally not deductible.

Only if Incurred in trade or business.

Entered in transaction for profit.

Presidentially declared emergency.

Question 12

R&E Expenses

Answer 12

• ability to expense /deduct in year paid or incurred.
• ability to defer and amortize over 60 months or more.
• ability to capitalize (deduct when project abandoned or worthless)

20% tax credit of certain research and experiment expenditures may be available.

Question 13

Net Operating Losses NOL

Answer 13

Business losses.
Above the line.

Can be carried forward.

Subject to 80% of taxable income limitation