Deductions, Losses & Depreciation Flashcards
Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year:
$42,000 Rent
63,000 Bribes
4,200 Travel expenses
25,200 Utilities
373,000 Wages
21,000 Payroll taxes
2,100 Property insurance
37,800 Illegal kickbacks
What are Vella’s total deductible expenses for tax purposes?
Total expenses: $568,300 - 63,000 - 37,800 = $467,500
Bribes and illegal kickbacks are non-deductible expenses.
Printer Company pays a $39,500 annual membership fee to a trade association for paper wholesalers. The trade association estimates that 60% of its dues are allocated to lobbying activities.
What are Printer’s total deductible expenses for tax purposes?
Annual membership x estimate
= $39,500 x (1 - 60%)
= $39,500 x 40%
= $15,800
Printer Company pays a $39,500 annual membership fee to a trade association for paper wholesalers. The trade association estimates that 60% of its dues are allocated to lobbying activities.
Assume the same facts as above, except that the $39,500 was incurred for in-house lobbying expenses. What are Printer’s total deductible expenses for tax purposes?
$0
Daniel, age 38, is single and has the following income and expenses in 2021:
$153,000 Salary income
6,500 Net rent income
2,700 Dividend income
24,000 Payment of alimony (divorce finalized in March 2019)
8,300 Mortgage interest on residence
3,400 Property tax on residence
3,300 Contribution to traditional IRA (assume the amount is fully deductible)
2,500 Contribution to United Church
575 Loss on the sale of real estate (held for investment)
4,950 Medical expenses
1,500 State income tax
5,000 Federal income tax
Daniel’s standard deduction for 2021 is $12,550.
Classify the following expense as either “Deductible for AGI”, “Deductible from AGI”, or “Not deductible”.
Payment of alimony Non-deductible
Mortgage interest on residence Deductible from AGI
Property tax on residence Deductible from AGI
Contribution to traditional IRA Deductible for AGI
Contribution to United Church Deductible from AGI
Loss on sale of real estate Deductible for AGI
Medical expenses Deductible from AGI
State income tax Deductible from AGI
Federal income tax Non-deductible
Daniel, age 38, is single and has the following income and expenses in 2021:
$153,000 Salary income
6,500 Net rent income
2,700 Dividend income
24,000 Payment of alimony (divorce finalized in March 2019)
8,300 Mortgage interest on residence
3,400 Property tax on residence
3,300 Contribution to traditional IRA (assume the amount is fully deductible)
2,500 Contribution to United Church
575 Loss on the sale of real estate (held for investment)
4,950 Medical expenses
1,500 State income tax
5,000 Federal income tax
Daniel’s standard deduction for 2021 is $12,550.
What is Daniel’s gross income and his AGI?
Gross Income:
Salary + net rent + dividend income
= $153,000 + 6,500 + 2,700 = $162,200
AGI:
Gross income - (mortgage interest + loss on sale of real estate)
=$162,200 - (8,300 + 575) = $158,325
Daniel, age 38, is single and has the following income and expenses in 2021:
$153,000 Salary income
6,500 Net rent income
2,700 Dividend income
24,000 Payment of alimony (divorce finalized in March 2019)
8,300 Mortgage interest on residence
3,400 Property tax on residence
3,300 Contribution to traditional IRA (assume the amount is fully deductible)
2,500 Contribution to United Church
575 Loss on the sale of real estate (held for investment)
4,950 Medical expenses
1,500 State income tax
5,000 Federal income tax
Daniel’s standard deduction for 2021 is $12,550.
Should Daniel itemize his deductions from AGI or take the standard deduction?
Since Daniel’s total itemized deductions (after any limitations) are $15,700, he would benefit from itemizing his deductions.
Itemized deductions
*If medical expenses exceed 10% of AGI, then they may be deducted. AGI was computed to be $158,325, therefore medical expenses will not be deductible since they do not exceed $15,832.50.
= Mortgage interest + property tax + charitable contributions + state income tax
= $8,300 + 3,400 + 3,300 + 1,500 = $15,700
Daniel’s itemized deductions are greater than the standard deduction.
Determine the treatment of a loss on rental property under the following facts:
$929,600 Basis
1,115,520 FMV before the loss
278,880 FMV after the loss
What is the amount of the loss? Is the loss deductible for/from AGI or non-deductible?
The amount of the loss is $836,640 which is a deduction for AGI.
Amount of loss = FMV before loss - FMV after loss
= $1,115,520 - 278,880 = $836,640
Belinda was involved in a boating accident in 2021. Her speedboat, which was used only for personal use and had a fair market value of $38,000 and an adjusted basis of $19,000, was completely destroyed. She received $13,300 from her insurance company. Her AGI for 2021 is $47,500.
How much is Belinda’s tentative casualty loss before any limitations (i.e $100 floor and AGI)? Is her loss currently deductible?
Adjusted basis - insurance recovery amount
= $19,000 - 13,300 = $5,700 tentative casualty loss before any limitations
Belinda’s loss is currently deductible only to the extent the loss can offset other personal casualty gains.
Tim, a single taxpayer, operates a business as a single-member LLC. In 2021, his LLC reports business income of $364,000 and business deductions of $637,000, resulting in a loss of $273,000.
What is the excess business loss amount?
$364,000 business income - $637,000 business deductions = $273,000 loss - $262,000 IRS threshold limit = $11,000 excess business loss
Tim, a single taxpayer, operates a business as a single-member LLC. In 2021, his LLC reports business income of $364,000 and business deductions of $637,000, resulting in a loss of $273,000.
Can this business loss be used to offset other income that Tim reports? If so, how much? If not, what happens to the loss?
Tim may use $262,000 of the $273,000 LLC business loss, to offset nonbusiness income. The excess business loss is treated as part of Tim’s NOL carryforward.
Andre acquired a computer on March 3, 2021, for $3,000. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation.
Calculate Andre’s cost recovery deduction for the computer in 2021.
Computer purchase price x depreciation rate
=$3,000 x 10% = $300 cost of recovery in 2021
Andre acquired a computer on March 3, 2021, for $3,000. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation.
Calculate Andre’s cost recovery deduction for the computer in 2022.
Computer purchase price x (1 / 5-yr useful life)
=$3,000 x (1/5) = $3,000 x 20%=$600 cost of recovery in 2022
On October 1, 2021, Verónica purchased a business. Of the purchase price, $98,000 is allocated to a patent and $588,000 to goodwill.
Calculate Verónica’s 2021 § 197 amortization deduction.
=($98,000 patent price / 15 years) x 3/12 months + ($588,000 goodwill price / 15 years) x 3/12 months
=$11,433 amortization deduction
On March 25, Parscale Company purchases the rights to a mineral interest for $8,458,500. At that time, the remaining recoverable units in the mineral interest are estimated to be 755,000 tons.
If 679,500 tons are mined and 113,250 tons are sold this year, calculate Parscale’s cost depletion for the year.
$8,458,500 cost of mineral rights / 755,000 estimated tons to be recovered = $11.20 cost per ton x 113,250 tons sold = $1,268,400 cost depletion
Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:
$20,000 Alimony (divorce finalized in 2017)
4,000 Charitable contributions
5,500 Contribution to a traditional IRA
7,500 Expenses paid on rental property
7,200 Interest on home mortgage and property taxes on personal residence
2,200 State income tax
What is Al’s AGI?
$140,000 gross income - (20,000 alimony + 5,500 IRA contributions + 7,500 rental property expenses)
=$107,000 AGI
