Deductions

Question 1

When is an expenditure deductible?

Answer 1

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

Question 2

What business expenses are generally deductible?

Answer 2

“Ordinary and necessary” trade or business expenses for actual operation of the business

start-up costs and the like don’t count

Question 3

What is the small-business exception for start-up costs?

Answer 3

$10,000 in the first year of the business, and additional costs may be amortized and deducted over a 180-month period

Question 4

What are some common deductible expenses for a business?

Answer 4

1. Employee compensation and benefits
2. Rent
3. State and local taxes (for individuals)
4. Insurance premiums

Question 5

When are travel expenses deductible as business expenses?

Answer 5

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

Question 6

Is business-linked entertainment deductible?

Answer 6

No.

Question 7

Are educational expenses deductible?

Answer 7

Only if incurred to maintain or improve a skill required in the taxpayer’s CURRENT trade or business.

Question 8

When are clothing expenses deductible?

Answer 8

Only if required for employment and not suitable for general use

Question 9

What is a net operating loss?

Answer 9

When expenses of a trade or business exceed income. These can be carried forward to future taxable years

Question 10

How can a net operating loss be carried over?

Answer 10

1. If it is an employer business expense, deduct above the line
2. If the taxpayer is self-employed, deduct above the line
3. If the expense is reimbursed by an employer, deduct above the line (otherwise below the line)

Question 11

If the sale of a capital asset results in a loss, how much can be deducted?

Answer 11

Up to $3,000

Question 12

Are fines deductible?

Answer 12

No, unless paid as restitution or to come into compliance

Question 13

Are illegal payments deductible?

Answer 13

No

Question 14

Are hobbies deductible?

Answer 14

Only to the extent of gross income from the activity

Question 15

Are passive activity losses deductible?

Answer 15

Only to the extent of passive activity income

Question 16

What is a depreciable asset?

Answer 16

An asset subject to wear and tear

Question 17

Whose assets are depreciable?

Answer 17

Those owned by the taxpayer

Question 18

How is depreciation calculated?

Answer 18

Statutorily defined, e.g. computers and automobiles across a 5-year period, office furniture 7-years, residential property 27.5 years

Question 19

After 2018, how much tangible personal property can be deducted in the year of acquisition?

Answer 19

Up to $1M

Question 20

How is cost recovery calculated for intangible assets?

Answer 20

Amortization over a defined period

Question 21

Is interested incurred with respect to an investment deductible?

Answer 21

Yes

Question 22

Are rental expenses deductible?

Answer 22

Yes

Question 23

Are rented vacation home expenses deductible?

Answer 23

Yes, if taxpayer rented for 15 days or more

Question 24

Are personal expenses deductible?

Answer 24

Generally not, but there are exceptions

Question 25

How much of student loan interest is deductible?

Answer 25

$2500, but phased out

Question 26

Is home mortgage interest deductible?

Answer 26

Yes, if on principal residence or second residence

Question 27

Are state and local taxes deductible?

Answer 27

Yes, but no more than $10k

Question 28

Are casualty losses deductible?

Answer 28

Yes, but following 2018 only if a federally declared disaster

Question 29

Are gambling losses deductible?

Answer 29

Yes, but only to the extent of gambling gains

Question 30

When is a charitable contribution deductible?

Answer 30

1. Made to qualified donee (e.g., tax exempt orgs)
2. Transfer of property or money (not services)
3. with no expectation of return benefit
4. within the same taxable year for which deduction is claimed
5. Not exceeding percentage limitations (60% AGI cap)
6. Be substantiated by written acknowledgment of donee if $250 or more

Question 31

Are unreimbursed medical and dental expenses deductible?

Answer 31

Only to extent they exceed 7.5% of AGI