Deductions Flashcards
When is an expenditure deductible?
If it is a capital asset, it is depreciated over the “useful life” of the asset
If it is an expense, it is deductible during the tax year
What business expenses are generally deductible?
“Ordinary and necessary” trade or business expenses for actual operation of the business
start-up costs and the like don’t count
What is the small-business exception for start-up costs?
$10,000 in the first year of the business, and additional costs may be amortized and deducted over a 180-month period
What are some common deductible expenses for a business?
- Employee compensation and benefits
- Rent
- State and local taxes (for individuals)
- Insurance premiums
When are travel expenses deductible as business expenses?
Deductible if away from home overnight or to require substantial sleep or rest. Only 50% of the cost of a meal
Not deductible if reimbursed by employer
Is business-linked entertainment deductible?
No.
Are educational expenses deductible?
Only if incurred to maintain or improve a skill required in the taxpayer’s CURRENT trade or business.
When are clothing expenses deductible?
Only if required for employment and not suitable for general use
What is a net operating loss?
When expenses of a trade or business exceed income. These can be carried forward to future taxable years
How can a net operating loss be carried over?
- If it is an employer business expense, deduct above the line
- If the taxpayer is self-employed, deduct above the line
- If the expense is reimbursed by an employer, deduct above the line (otherwise below the line)
If the sale of a capital asset results in a loss, how much can be deducted?
Up to $3,000
Are fines deductible?
No, unless paid as restitution or to come into compliance
Are illegal payments deductible?
No
Are hobbies deductible?
Only to the extent of gross income from the activity
Are passive activity losses deductible?
Only to the extent of passive activity income
What is a depreciable asset?
An asset subject to wear and tear
Whose assets are depreciable?
Those owned by the taxpayer
How is depreciation calculated?
Statutorily defined, e.g. computers and automobiles across a 5-year period, office furniture 7-years, residential property 27.5 years
After 2018, how much tangible personal property can be deducted in the year of acquisition?
Up to $1M
How is cost recovery calculated for intangible assets?
Amortization over a defined period
Is interested incurred with respect to an investment deductible?
Yes
Are rental expenses deductible?
Yes
Are rented vacation home expenses deductible?
Yes, if taxpayer rented for 15 days or more
Are personal expenses deductible?
Generally not, but there are exceptions
