Deductions

Question 1

treatment of keyman insurance policies

Answer 1

A taxpayer may not deduct life insurance premiums in which the taxpayer is directly or indirectly the beneficiary. Hence, Ral Corp. may not deduct the $3,000 in keyman insurance premiums that it paid on Budd’s life because the corporation is the beneficiary. However, a taxpayer may deduct the group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds. Thus, Ral Corp. may deduct the $4,000 in group term insurance premiums paid on the $10,000 life insurance policies for each of Ral Corp.’s four employees.

Question 2

When is alimony deductible?

Answer 2

• You and your spouse or former spouse do not file a joint return with each other,
• You pay in cash (including checks or money orders),
• The divorce or separation instrument does not say that the payment is not alimony,
• If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment,
• You have no liability to make any payment (in cash or property) after the death of your spouse or former spouse; and
• Your payment is not treated as child support.

Question 3

treatment of sewage system addition in regards to deductions

Answer 3

Assessments for public improvements, that tend to increase the value of the taxpayer’s property (whether or not the value actually increases), generally, are not deductible. However, assessments may be deducted to the extent that the taxpayer can prove the assessment is allocable to maintenance.

Question 4

state and local tax deductions

Answer 4

Certain state and local taxes are deductible as an itemized expense during the year in which the taxes were actually paid. Deductible taxes include income and real property. State and local fees are not deductible. Federal income taxes also are not deductible

Question 5

investment interest expense deduction

Answer 5

Investment interest expense is deductible to the extent of net investment income. Net investment income is defined as investment income ($10,000) less noninterest investment expenses ($8,000), or $2,000. So, $2,000 of the $5,000 of investment interest expense is deductible as an itemized deduction. The remaining $3,000 is carried over, indefinitely, and deducted in a year that has sufficient net investment income.
(#s are from a practice q)

Question 6

how to calculate expenses subject to 2% floor

Answer 6

Add all expenses, then subtract 2% AGI, and that’s the amount allowed for the deduction.
Expenses include: tax prep fees, union dues, custodial fees, professional applications, legal fees to collect money

Question 7

What bad debt write off method are corporations required to use (excluding financial institutions)?

Answer 7

Direct charge off method
Under the direct charge-off method, corporations may claim a deduction once a specific business debt becomes partially or wholly worthless and a specific nonbusiness debt becomes wholly worthless.

Certain financial institutions are allowed to use the reserve method

Question 8

Treatment of property used for both rental and personal purposes

Answer 8

If the number of rental days is less than 14 then the property is treated as if it was used 100% for personal use. In that case, the rental revenue is ignored (i.e., does not have to be recognized).

The only items that can be deducted are real estate taxes and mortgage and these items must be reported on Schedule A.

Therefore, there is no rental income and no rental expenses.