Deductions

Question 1

What deductions are allowed for illegal drug businesses?

Answer 1

Only the cost of goods sold is allowed as a deduction.

Question 2

List the types of deductions that are prohibited.

Answer 2

1. Personal expenses unless specifically allowed;
2. Expenditures benefiting more than 1 period must be capitalized;
3. Expenditures against public policy;
4. Expenses used to generate tax-exempt income.

Question 3

List the requirements for business expense deductions.

Answer 3

1. Must have bona fide profit motive;
2. Must be ordinary and necessary;
3. Must be reasonable in amount.

Question 4

Lobbying expenses are not deductible if they are incurred to influence legislation at what levels of government?

Answer 4

No deduction for lobbying at the federal or state level.

Question 5

What deductions are allowed “above the line” to arrive at adjusted gross income (AGI)?

Answer 5

1. Alimony payments;
2. Trade or business;
3. Rent or royalty expenses;
4. Losses;
5. 50% of Self-employment tax;
6. 100% of medical insurance for self-employed;
7. Moving expenses;
8. IRA and Keogh contributions;
9. Student loan interest.

Question 6

What is the limit on the student loan interest deduction?

Answer 6

Limited to $2,500 of interest on loans to finance the cost of higher education.

Question 7

What requirements must be met to deduct moving expenses?

Answer 7

1. New job must add 50 miles or more to commute;
2. Must be active in new job for 39 weeks during first 52 weeks after move;
3. Limited to reasonable amounts to move possessions, and transportation costs for taxpayer and others residing with taxpayer.

Question 8

What type of property taxes may a taxpayer deduct as an itemized deduction?

Answer 8

Taxes imposed on property owned by taxpayer that is used for personal purposes.

Question 9

Describe what is allowable for the deduction for home mortgage interest.

Answer 9

1. Interest paid on debt relating to principal residence and second home is deductible;
2. Debt limited to $1 million on debt to purchase, construct, or improve residence;
3. Additionally, interest on $100,000 of home equity loans is deductible;
4. Points paid on loans can be deducted in a year of purchase or improvement;

Question 10

List the qualifying medical expenses that may be included in the computation of uninsured medical expense deduction.

Answer 10

1. Doctors, eyeglasses, dentists, and health insurance;
2. Cost of prescribed drugs;
3. Medical transportation and travel up to $50/night/person;
4. Costs of altering home for handicapped person to the extent FMV is not increased.

Question 11

What is the investment interest deduction limit?

Answer 11

Limited to net investment income.

Question 12

Describe the income tax deduction.

Answer 12

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.

Question 13

What determines whether a taxpayer should take a standard deduction or an itemized deduction?

Answer 13

Taxpayer deducts greater of standard deduction or itemized deductions.

Question 14

Define “investment income.”

Answer 14

Interest, dividends, ordinary gains (not long-term capital gains unless elected by taxpayer) less investment expenses.

Question 15

How is the uninsured medical expense deduction calculated?

Answer 15

Total medical expenses for taxpayer, spouse, and dependents reduced by 10% or 7.5% of AGI.

Question 16

How is the 2% of the AGI floor limit calculated?

Answer 16

Applied by subtracting 2% of AGI from subjected deductions.

Question 17

List the characteristics of a charitable contribution.

Answer 17

1. Must be made to qualifying organization (not political organizations);
2. Can include cash or property, but not services;
3. Written records of contribution are required;
4. Limited based on AGI.

Question 18

What deductions are subject to a 2% floor?

Answer 18

1. Employee expenses not reimbursed under an accountable plan;
2. Investment expenses;
3. Tax return preparation expenses;
4. Home office expenses of an employee;
5. Hobby expenses (an offset to income)

Question 19

How is casualty loss calculated for business property?

Answer 19

Insurance proceeds - adjusted basis of damaged property.

Question 20

What floor limits are applied to casualty losses on personal use property?

Answer 20

1. $100 for each occurrence;

2. Total losses for the year are reduced by 10% of AGI.

Question 21

What entities make up Private “B” charities?

Answer 21

Fraternal orders, cemetery companies, and private foundations operated for religious, scientific, educational, or charitable purposes.

Question 22

List the personal expenses that are deductible from AGI.

Answer 22

1. Home Mortgage Interest;
2. Taxes;
3. Charitable contributions;
4. Casualty losses;
5. Medical expenses.
6. business related costs

Question 23

Define “casualty.”

Answer 23

A sudden, unexpected event damaging or destroying an asset.

Question 24

Describe the limits on charitable contributions.

Answer 24

1. Deduction for contributions of long-term capital gain property to “A” charities limited to 50% of AGI;
2. Deduction for contributions of long-term capital gain property to “B” charities limited to 30% of AGI;
3. Unused deductions carry forward 5 years.

Question 25

What types of organizations qualify for charitable contributions?

Answer 25

1. Public “A” Charities;

2. Private “B” Charities.

Question 26

What entities make up Public “A” charities?

Answer 26

Government subdivisions, hospitals, churches, schools, and similar institutions operated for religious, scientific, educational, or charitable purposes.

Question 27

List the requirements for entertainment deductions.

Answer 27

1. Activity must have a business purpose;
2. Substantial business discussion must occur;
3. Club dues not permitted;
4. Contemporaneous written records are required;
5. Reduced by 50%, unless compensation to employee.

Question 28

What deductions are allowed for business travel?

Answer 28

1. Limited to trips with business purpose;
2. Amount and purpose must be substantiated;
3. Meals and lodging when “away from home” overnight;
4. Meals are reduced by 50%.

Question 29

List the requirements for deducting losses for worthless assets.

Answer 29

1. Asset must be totally worthless;

2. Treated as sold for no consideration on last day of taxable year.

Question 30

List the requirements for deducting business bad debts.

Answer 30

1. Only use direct write-off method;

2. Deducted to extent loan is partially worthless.

Question 31

List the requirements for deducting non-business bad debts.

Answer 31

1. Must be a bona fide loan;
2. Deductible as short-term capital losses in year of complete worthlessness;
3. Partial worthlessness not deductible.

Question 32

Define “passive activity.”

Answer 32

A profit-seeking activity in which the taxpayer does not materially participate in the management of the activity.

Question 33

What are the requirements for active participation in the management of realty?

Answer 33

1. Taxpayer must own at least 10% of the property;
2. Taxpayer must significantly participate in decision making;
3. Maximum loss of $25,000;
4. Phased out at 50% rate for AGI exceeding $100,000.

Question 34

Describe the exception to passive loss rules.

Answer 34

1. Real estate professionals (minimum 750 hours employment/yr);
2. Active participation for management of rental realty.

Question 35

Describe the hobby deduction limitations.

Answer 35

1. Limited to gross profit generated by hobby;
2. Can only be deducted as 2% miscellaneous itemized deductions (except for mortgage interest and property taxes);
3. Expenses must be deducted in a specific order.

Question 36

List the order of hobby deductions that can be taken on a tax return.

Answer 36

1. Mortgage Interest and Property Taxes;
2. Cash expenses;
3. Depreciation.

Question 37

List the requirements for home office deductions

Answer 37

1. Business use must be exclusive and regular;
2. Must be a principal place of business or for the convenience of the employer;
3. Must be allocated between residence and office;
4. Limited to income after non-office expenses.

Question 38

Describe the general treatment of passive activity gains/losses.

Answer 38

The expenses and revenues from “passive” activities are combined (netted) and the expenses in excess of revenue (the passive loss) is suspended.

Question 39

When does the hobby/business burden of proof shift to the Internal Revenue Service?

Answer 39

When the activity generates a profit in three out of five consecutive years.