Deductions: Business vs. Personal Expenses

Question 1

Business Use of Home

Answer 1

RULE

• Taxpayer is not permitted to deduct any expenses related to use of portion of his home for business purpose

EXCEPTION:

• The portion of the home that is used exclusively and on a regular basis for business purposes can be deducted

Question 2

Limitation on deduction for business use of home

Answer 2

Amount of deduction is limtied to the amount of income that taxpayer earns form the business

Question 3

Business Use of Automobile

Answer 3

RULE

• Can deduct autoexpenses in proportion to the car’s use for business purposes
• BUT the deduction that can obtained from luxury autos is limited

Question 4

Clothing

Answer 4

Deductible:

• Clothing that is a uniform or otherwise distinct that cannot readily be used during nonbusiness hours

Non-deductible

• Anything else (personal expense)

Question 5

Educational Expenses

Answer 5

• May deduction education expenses that either
  maintain or improve skills required for his employment, trade or business, or
• meet the express requirements of his employer or applicable law
• necessary to retrain his established employment relationship, status, or rate of compensation

Question 6

Non-deductible educational expenses

Answer 6

An education expense is non-deductible under §162 if the education received either:

1. meets the minimum education requirements for qualification in the taxpayer’s employment, trade, or business; OR
2. qualifies the taxpayer for a new trade or business

Question 7

• Entertainment Expenses

Answer 7

RULE

• Allowable busienss expenses, including business meals up to 50% deduction

Tickets to sporting/theatrical events

• Expenditures in excess of face-value are not deductible, except charitable fundraising tickets

Records

• The expenses must be substantiated by adequate records – must include reason for the entertainment

Question 8

Dual-use Property

Answer 8

• The most often encountered is business use of a home.
  
  • It is possible to deduct these expenses, but they must relate to exclusive use of part of the hom
• Personal expenses are not deductible

Question 9

Hobby Losses

Answer 9

What are hobby losses?

• Recreational activities that are arguably engaged in for profit.

RULE

1. If the activity is not engaged in for profit, deductions are limited to income from the activity
2. Such If an activity that has produced a profit in three out of five years (or two out of seven years in the case of horse breeding or racing), it is presumed to be a business engaged in for profit, and no limits are imposed by § 183

Question 10

Hobby Losses

Facts and Circumstances Test

Answer 10

Even if the activity is not profitable, the taxpayer can still be entitled to a deduction if he passes a facts and circumstances test