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
Hobby Losses
Losses are personal expenses - NOT deductible
IF cleas PROFIT motive, then the activity is NOT a hobby
Expenses related to hobby deducted in following order:
- items tht would have been deductible anyway
- Other cash expenses
- Depreciation
- *REVENUE reported on Page 1 1040
- **Expenses and depreciation are reported as 2% misc. itemized deduction
Home Office
Expenses are deductible is EXCLUSIVELY used on a regular basis as either
- Principal place of business OR
- A place of business used by clients, patients, or customers
THE use is for the convenience of the employer
**LIMITED to income from the business less all other business expenses; IN the same order as HOBBY losses
***ANY disallowed expenses are carried forward indefinitely
SAFE HARBOR - sq footage * $5.00 limited to 300sq feet - deduction limited to 1,500
Vacation Homes
- IF rented for less than 15 days a year… it is PERSONAL residence; Rent income is EXCLUDED; mortgage interest and property taxes deductible on Sch. A
- RENTAL PROPERTY if rented for 15 days or MORE and NOT used for personal purposes for more than the greater of: 14days or 10% days rented
* **ALL rent is taxable; expenses pro-rated; LOSS is allowable - treated as a PERSONAL/RENTAL PROPERTY if rented for 15days or MORE and IS USED for personal purposes more than the greater of 14days OR 10% of total days rented
* **pro rate expenses; LOSS is not ALLOWED (similar to hobby losses)
Passive Losses
Losses from PASSIVE activities CANNOT offset earned income (active) or portfolio (investment) income
Activity in which the taxpayer DOES NOT MATERIALLY PARTICIPATE.. most rental activities, and any limited partnership interest
DISALLOWED passive losses can be carried forward to offset passive income in future years AND to offset any gain or increase the loss when the passive activity is disposed of in a fully taxable transaction
Rental Real Estate Passive EXCEPTION
IF the taxpayer ACTIVELY PARTICIPATES in a rental real estate activity ….. 25,000 of losses from such activities CAN offset ACTIVE/PORTFOLIO income
PHASES OUT between MAGI of 100,000-150,000
REAL ESTATE PROFESSIONALS
Perform more than 50% of personal services in trade/bus involving real property AND perform more than 750 hours of services in real property trades/bus in which he/she MATERIALLY participates
**CAN DEDUCT RENTAL REAL ESTATE LOSSES AGAINST ACTIVE/PORTFOLIO - NOT LIMITED TO 25,000
