Deductions Flashcards
What deductions are allowed for illegal drug businesses?
Only the cost of goods sold is allowed as a deduction.
List the types of deductions that are prohibited.
- Personal expenses unless specifically allowed;
- Expenditures benefiting more than 1 period must be capitalized;
- Expenditures against public policy;
- Expenses used to generate tax-exempt income.
List the requirements for business expense deductions.
- Must have bona fide profit motive;
- Must be ordinary and necessary;
- Must be reasonable in amount.
Lobbying expenses are not deductible if they are incurred to influence legislation at what levels of government?
No deduction for lobbying at the federal or state level.
What deductions are allowed “above the line” to arrive at adjusted gross income (AGI)?
- Alimony payments;
- Trade or business;
- Rent or royalty expenses;
- Losses;
- 50% of Self-employment tax;
- 100% of medical insurance for self-employed;
- Moving expenses;
- IRA and Keogh contributions;
- Student loan interest.
What is the limit on the student loan interest deduction?
Limited to $2,500 of interest on loans to finance the cost of higher education.
What requirements must be met to deduct moving expenses?
- New job must add 50 miles or more to commute;
- Must be active in new job for 39 weeks during first 52 weeks after move;
- Limited to reasonable amounts to move possessions, and transportation costs for taxpayer and others residing with taxpayer.
What type of property taxes may a taxpayer deduct as an itemized deduction?
Taxes imposed on property owned by taxpayer that is used for personal purposes.
Describe what is allowable for the deduction for home mortgage interest.
- Interest paid on debt relating to principal residence and second home is deductible;
- Debt limited to $1 million on debt to purchase, construct, or improve residence;
- Additionally, interest on $100,000 of home equity loans is deductible;
- Points paid on loans can be deducted in a year of purchase or improvement;
List the qualifying medical expenses that may be included in the computation of uninsured medical expense deduction.
- Doctors, eyeglasses, dentists, and health insurance;
- Cost of prescribed drugs;
- Medical transportation and travel up to $50/night/person;
- Costs of altering home for handicapped person to the extent FMV is not increased.
What is the investment interest deduction limit?
Limited to net investment income.
Describe the income tax deduction.
Personal income taxes imposed by state, local, or foreign governments are deductible; taxpayer can choose to deduct greater of state sales tax or state income tax.
What determines whether a taxpayer should take a standard deduction or an itemized deduction?
Taxpayer deducts greater of standard deduction or itemized deductions.
Define “investment income.”
Interest, dividends, ordinary gains (not long-term capital gains unless elected by taxpayer) less investment expenses.
How is the uninsured medical expense deduction calculated?
Total medical expenses for taxpayer, spouse, and dependents reduced by 10% or 7.5% of AGI.
How is the 2% of the AGI floor limit calculated?
Applied by subtracting 2% of AGI from subjected deductions.
List the characteristics of a charitable contribution.
- Must be made to qualifying organization (not political organizations);
- Can include cash or property, but not services;
- Written records of contribution are required;
- Limited based on AGI.
What deductions are subject to a 2% floor?
- Employee expenses not reimbursed under an accountable plan;
- Investment expenses;
- Tax return preparation expenses;
- Home office expenses of an employee;
- Hobby expenses (an offset to income)
How is casualty loss calculated for business property?
Insurance proceeds - adjusted basis of damaged property.
What floor limits are applied to casualty losses on personal use property?
- $100 for each occurrence;
2. Total losses for the year are reduced by 10% of AGI.
What entities make up Private “B” charities?
Fraternal orders, cemetery companies, and private foundations operated for religious, scientific, educational, or charitable purposes.
List the personal expenses that are deductible from AGI.
- Home Mortgage Interest;
- Taxes;
- Charitable contributions;
- Casualty losses;
- Medical expenses.
- business related costs
Define “casualty.”
A sudden, unexpected event damaging or destroying an asset.
Describe the limits on charitable contributions.
- Deduction for contributions of long-term capital gain property to “A” charities limited to 50% of AGI;
- Deduction for contributions of long-term capital gain property to “B” charities limited to 30% of AGI;
- Unused deductions carry forward 5 years.
What types of organizations qualify for charitable contributions?
- Public “A” Charities;
2. Private “B” Charities.
What entities make up Public “A” charities?
Government subdivisions, hospitals, churches, schools, and similar institutions operated for religious, scientific, educational, or charitable purposes.
List the requirements for entertainment deductions.
- Activity must have a business purpose;
- Substantial business discussion must occur;
- Club dues not permitted;
- Contemporaneous written records are required;
- Reduced by 50%, unless compensation to employee.
What deductions are allowed for business travel?
- Limited to trips with business purpose;
- Amount and purpose must be substantiated;
- Meals and lodging when “away from home” overnight;
- Meals are reduced by 50%.
List the requirements for deducting losses for worthless assets.
- Asset must be totally worthless;
2. Treated as sold for no consideration on last day of taxable year.
List the requirements for deducting business bad debts.
- Only use direct write-off method;
2. Deducted to extent loan is partially worthless.
List the requirements for deducting non-business bad debts.
- Must be a bona fide loan;
- Deductible as short-term capital losses in year of complete worthlessness;
- Partial worthlessness not deductible.
Define “passive activity.”
A profit-seeking activity in which the taxpayer does not materially participate in the management of the activity.
What are the requirements for active participation in the management of realty?
- Taxpayer must own at least 10% of the property;
- Taxpayer must significantly participate in decision making;
- Maximum loss of $25,000;
- Phased out at 50% rate for AGI exceeding $100,000.
Describe the exception to passive loss rules.
- Real estate professionals (minimum 750 hours employment/yr);
- Active participation for management of rental realty.
Describe the hobby deduction limitations.
- Limited to gross profit generated by hobby;
- Can only be deducted as 2% miscellaneous itemized deductions (except for mortgage interest and property taxes);
- Expenses must be deducted in a specific order.
List the order of hobby deductions that can be taken on a tax return.
- Mortgage Interest and Property Taxes;
- Cash expenses;
- Depreciation.
List the requirements for home office deductions
- Business use must be exclusive and regular;
- Must be a principal place of business or for the convenience of the employer;
- Must be allocated between residence and office;
- Limited to income after non-office expenses.
Describe the general treatment of passive activity gains/losses.
The expenses and revenues from “passive” activities are combined (netted) and the expenses in excess of revenue (the passive loss) is suspended.
When does the hobby/business burden of proof shift to the Internal Revenue Service?
When the activity generates a profit in three out of five consecutive years.
