Income Tax, Fundamentals And Calculations: deductions and losses

Question 1

Deductions for AGI are often referred to as what and what expenses are included

Answer 1

Above the line deductions

Include expenses related to a trade or business , alimony paid (if divorce prior to 2019), 50% of self-employment tax paid, capital loss deduction, student loan interest, movie expenses for active duty military

Question 2

Itemized deductions are deductions from AGI and are often referred to as what and what do they include

Answer 2

Below the line deductions…. Also known as schedule A itemized deductions.

Include charitable contributions , medical expenses, mortgage interest, taxes paid, and casually losses in a federally declared disaster area

Question 3

Section 162 allows deductions for expenses incurred in a trade or business expenses must have been for what

Answer 3

Profit motive

Question 4

Deductions for AGI are reported on what form before the calculation of AGI

Answer 4

Front page of form 1040

Question 5

Deductions from AGI itemized deductions are reported where

Answer 5

Schedule A

Question 6

For business expenses to be deductible, they need to be what?

Answer 6

Ordinary and necessary for business expenses, or in connection with property held for the production of rents or royalties

Must be ordinary and necessary

Question 7

If a distribution is classified as a dividend from a C corporation It will be double taxed by who

Answer 7

Wants to the corporation (earnings)

To the recipient shareholder

Question 8

If the IRS determines that compensation paid by a corporation to a shareholder is unreasonably high, the excess compensation will be classified as what?

Answer 8

A dividend double tax

Question 9

The reasonable requirement is typically associated with what

Answer 9

Compensation amounts and often with closely held corporations

Question 10

In determining reasonableness, IRS will consider the following

Answer 10

Size of the company

Duties of the employees receiving compensation

Qualifications of the employee

Salaries for similar executives

Conflict of interest

Salary of shareholder comp, compared to gross income of company

Evidence of a consistent compensation plan

Question 11

S - corporation - distribution to a shareholder is generally treated as what

Answer 11

Return of capital

Shareholders would desire a distribution from an S corporation rather than a salary, which is subject to FICA

IRS determines that compensation is unreasonably low IRS will likely re-classify any excess of the distribution as salary

Question 12

What are the two taxpayer methods of accounting?

Answer 12

Cash method, and the accrual method

Question 13

Cash basis, taxpayer receives a deduction when expenses have been what

Answer 13

Paid

Question 14

A cruel basis taxpayer receives a deduction when expenses is what

Answer 14

Incurred

Question 15

Are the cost of defending a criminal action related to a business deductible?

Answer 15

Yes, but not any associated fines or penalties

Question 16

Is the cost of defending an individual taxpayer in a criminal action deductible?

Answer 16

No

Question 17

Is there a deduction for capital expenditures

Answer 17

No current deduction is available for buildings betterments or permanent improvements made to a property

Capitalize depreciate over and appropriate period

Asset must have an attainable life remember land has none and therefore is not depreciable

Intangible assets that are not intangible financial assets example stocks bonds or other securities are amortized over 15 years, including Goodwill

Question 18

No deduction is allowed for expenditures that benefit another taxpayer. What is the exemption to this rule?

Answer 18

Medical expenses

Question 19

If income is tax exempt, can the taxpayer deduct expenses or interest related to that income?

Answer 19

No

Question 20

How does a classification of a hobby or business affect the deductibility of losses?

Answer 20

Activities deemed to be a hobby losses incurred may not be fully deductible

Activity is a trader business bosses are deductible on schedule C and can offset other taxpayer income

Question 21

What are the factors to be considered whether a hobby can be classified as a business?

Answer 21

Conducted in a business like manner

Expertise

Time and effort expended

Expectation that the assets of the activity will appreciate and value

Previous success, similar activities

History of income or losses from the activity

Relationship of profit earn to losses incurred

Financial status, whether there is other income

Elements of person of pleasure or recreation in the activity

Conducting business professionally , time spent, regular hours, and so forth

Question 22

If an activity has generated profit for three out of five years, the burden of proof that the hobby is considered a business is on who

Answer 22

The IRS

Question 23

Hobby income is reduced by what?

Answer 23

Property taxes, and interest

Question 24

Our hobby expenses deductible

Answer 24

No, just property taxes, and mortgage interest that are tributable to the hobby

Question 25

What determines tax treatment of vacation home rentals

Answer 25

Relative time rented versus personal use

Question 26

Property rented less than 15 days per year is considered what and what is the tax treatment?

Answer 26

Consider personal use

Exclude rental income from gross income

Expenses, non-deductible, except mortgage, interest, taxes, and casualty losses (schedule A)

Question 27

If the rental property is rented at least 15 days per year and is not used for personal use more than the greater of 14 days per year or 10% of rental days, it is classified as primarily rental use. What is the tax treatment?

Answer 27

Allocate expenses between rental and personal

Can deduct loss up to $25,000, phased out at AGI between $100,000 and $150,000

Report income and expenses on schedule E

Question 28

Rental property rented at least 15 days per year and used for personal use more than the greater of 14 days per year or 10% of rental days is considered what and how is it treated for tax purposes

Answer 28

Mixed use

Allocate expenses between rental and personal

Deduct expenses (in order of interest/taxes, maintenance, and utilities, and then appreciation, up to amount of gross income

Cannot deduct lost currently, but can carry forward

Report income and expenses on schedule E (apply hobby rules)

Question 29

Our losses between related parties allowed

Answer 29

No

Lost may be recovered if at the eventual sale to an unrelated party, the property is sold for a game

Seller the relative who bought the property can offset the gain with the previously disallow loss

If the deduction is not recovered at a subsequent sale, it is lost forever

Question 30

Who are considered related parties?

Answer 30

Immediate family, brother, sister, spouse, ancestors and lineal descendants, closely held corporations (greater than 50%), C corporations

Question 31

Stock owned by a trust is considered owned by who

Answer 31

Beneficiaries of the trust

Question 32

Example of the related party rules

Answer 32

Question 33

Are legal accounting fees, incurred in connection with trade, business, or further production of rents and royalties, deductible for AGI?

Answer 33

Yes

Question 34

When are legal and accounting fees deductible from AGI

Answer 34

Incurred in connection with trade, business or for the production of rents and royalties

Incurred in the determination of any tax as an itemized deduction

Question 35

Are legal fees incurred for personal purposes deductible

Answer 35

No

Question 36

How are legal fees related to the acquisition of an asset treated for tax purposes?

Answer 36

Their added to the basis of the property

Question 37

Are worthless securities deductible

Answer 37

Yes, must be completely worthless to be a capital loss occurred on the last day of the year in which they become worthless limited to $3000 a year in losses

Question 38

Small business stock section 1244 what are the tax rules?

Answer 38

Applies to losses only

As ordinary loss treatment if the loss is sustained by an individual who acquires the securities directly from the corporation

Limited to $50,000 annually or $100,000 annually for joint filer any losses in excess of the limits or Losses 70 to the $3000 limit

In order to qualify corporation must receive less than $1 million in capital for stock at time of issue

Question 39

How are net operating losses for a business treated?

Answer 39

Carried forward indefinitely no carry back

Not offering losses may be carried forward if following the last year

Old is completely written off before using any of the more recent net operating losses. Each loss is calculated and maintains its own integrity.

Loss is limited to 80% of the total taxable income reported for the Carrie forward years