Income Tax, Fundamentals And Calculations: deductions and losses Flashcards
Deductions for AGI are often referred to as what and what expenses are included
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
Itemized deductions are deductions from AGI and are often referred to as what and what do they include
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
Section 162 allows deductions for expenses incurred in a trade or business expenses must have been for what
Profit motive
Deductions for AGI are reported on what form before the calculation of AGI
Front page of form 1040
Deductions from AGI itemized deductions are reported where
Schedule A
For business expenses to be deductible, they need to be what?
Ordinary and necessary for business expenses, or in connection with property held for the production of rents or royalties
Must be ordinary and necessary
If a distribution is classified as a dividend from a C corporation It will be double taxed by who
Wants to the corporation (earnings)
To the recipient shareholder
If the IRS determines that compensation paid by a corporation to a shareholder is unreasonably high, the excess compensation will be classified as what?
A dividend double tax
The reasonable requirement is typically associated with what
Compensation amounts and often with closely held corporations
In determining reasonableness, IRS will consider the following
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
S - corporation - distribution to a shareholder is generally treated as what
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
What are the two taxpayer methods of accounting?
Cash method, and the accrual method
Cash basis, taxpayer receives a deduction when expenses have been what
Paid
A cruel basis taxpayer receives a deduction when expenses is what
Incurred
Are the cost of defending a criminal action related to a business deductible?
Yes, but not any associated fines or penalties
Is the cost of defending an individual taxpayer in a criminal action deductible?
No
Is there a deduction for capital expenditures
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
No deduction is allowed for expenditures that benefit another taxpayer. What is the exemption to this rule?
Medical expenses
If income is tax exempt, can the taxpayer deduct expenses or interest related to that income?
No
How does a classification of a hobby or business affect the deductibility of losses?
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
What are the factors to be considered whether a hobby can be classified as a business?
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
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
The IRS
Hobby income is reduced by what?
Property taxes, and interest
Our hobby expenses deductible
No, just property taxes, and mortgage interest that are tributable to the hobby
What determines tax treatment of vacation home rentals
Relative time rented versus personal use
Property rented less than 15 days per year is considered what and what is the tax treatment?
Consider personal use
Exclude rental income from gross income
Expenses, non-deductible, except mortgage, interest, taxes, and casualty losses (schedule A)
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?
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
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
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)
Our losses between related parties allowed
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
Who are considered related parties?
Immediate family, brother, sister, spouse, ancestors and lineal descendants, closely held corporations (greater than 50%), C corporations
Stock owned by a trust is considered owned by who
Beneficiaries of the trust
Example of the related party rules
Are legal accounting fees, incurred in connection with trade, business, or further production of rents and royalties, deductible for AGI?
Yes
When are legal and accounting fees deductible from AGI
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
Are legal fees incurred for personal purposes deductible
No
How are legal fees related to the acquisition of an asset treated for tax purposes?
Their added to the basis of the property
Are worthless securities deductible
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
Small business stock section 1244 what are the tax rules?
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
How are net operating losses for a business treated?
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
