Deductions Flashcards
Activities for Tax Purposes
- Trade or business (as employee also) must relate to the carrying on of a trade or business activity AND ordinary, necessary, & reasonable
- Investment (stocks,bonds, coins, etc) ordinary, necessary, reasonable; managing rental property
- Personal (everything else) NOT deductible at all unless specific law allows it (charitable, mortgage interest, etc.)
Disallowed Deductions
**Executive compensation for the CEO & 4 other most highly compensated officers that exceeds $1 million per person is NOT deductible UNLESS the income is based on a performance based compensation plan
**Lobbying expenses at STATE and FEDERAL level
**Expenses used to generate tax-exempt income
**Political Contributions
**Public Policy Fines; tickets,penalties, expenses of operating an illegal drug business
Drug businessess - COGS can ONLY be DEDUCTED
ONR expenses of other illegal businessess are permitted as long as not against public policy
*idea is to only tax income
Prepaid Expenses
Under the cash method; immediate deduction can be taken IF benefits from expenditure do NOT extend beyond the earlier of:
- 12 months after benefits first begin
- The end of the year after the year in which the payment was made
amortize over benefit period if do NOT meet rule
***Prepaid interest ALWAYS has to be amortize dover the life of the loan
MISC DEDUCTIONS
Taxpayer CAN deduct (accrual meth exceptions)
refunds, rebates, prizes, provision of warranty work or service contracts, taxes, and insurance premiums ONLY WHEN actually PAID
Vacation Pay and Bonuses ARE deducted ONLY if paid within 2 1/2 months after the close of the tax year
Capitalizaton Rules
The cost of a UOP - unit of production - includes ALL related expenditures incurred before the sdate the asset was placed into service, even repairs
A single UOP includes ALL components that are functionally interependent
The taxpayer can elect to capitalize employee compensation overhead costs
Safe Harbor - Lower Cost Items
Applies IF taxpayer:
A. has written procedures in place that provide for the expensing of amounts below a specified $ amount or that have a useful life of 12 months or less
B. Expenses the items for its book records to expense for tax purposes
C. Insures that items costing more than 5,000 are capitalized (2,500 if no GAAP f/s)
Qualifying Small Taxpayers
10 million or less average annual gross receipts in last 3 years
CAN deduct improvements made to an eligible building property (one w/un-adj basis of 1,000,000 or less
Applies ONLY if the total amount paid during the tax year for repairs, maintenance, improvements, and similar activities on the eligible bldg does NOT exceed the lesser of 10,000 or 2% of the bldgs un-adj. basis
Business and Rental Expenses - indirectly FOR AGI
Reported on Schedule C, Net income reported, therefore FOR AGI
Moving Expenses - FOR AGI
Has to relate to a new job
IF QUALIFIES:
1. moving household goods and personal items
2. traveling (lodging but not meals)
REQUIREMENTS:
distance test - must be at least 50 miles (> or = to x+50) that is from your old house to your new job
time test - full-time basis; 39 weeks out of 12 months; self employed 78 weeks during first 24 months
Interest on Education Loans - FOR AGI
defined as a loan to pay higher education expenses for the taxpayer and the taxpayer’s spouse and dependents; dedution is phased out for certain higher income taxpayers; WILL NOT BE ALLOWED to deduct IF can be declared as a dependent by someone else
MAXIMUM is $2,500
OTHER deductions - FOR AGI
Alimony; by payor
1/2 Self employment taxes computed on sch. se
100% of health insurance premiums by SELF EMPLOYER workers as long as it doesn’t exceed net earnings
IRA and other retirement plan contributions
- Higher Ed expenses - limit 4,000; w/phaseouts
- Educator expenses - up to $250
- repayment of jury duty fees paid to employer
- forfeiture penalties(cash in cod early)
Bad Debts
DEDCUTIBLE ONLY for accrual basis.. that have prev recognized income and therefore have basis in the receivable
*Specific charge off method MUST be used for tax purposes
Non-business bad debts
ALWAYS treated as a short term capital loss
NO deduction is allowe until the debt becomes TOTALLY worthless
Worthless Securities
treated as being sold for NO consideration on the last day of the tax year
Applies to stocks and bonds
NOLs
MUST be carried back to the two preceeding years…unless you elect not to
CAN carry over for 20 years
Computation = **business and casualty losses… any other nonbusiness losses or expenses must be added back to the taxable loss to determine NOL
