Limitations on Business Deductions

Question 1

Are losses from hobbies deductible?

Answer 1

Considered as personal loss and not deductible.

Question 2

How is the activity determined either hobby or business?

Answer 2

TP clearly has a profit motive then it’s not a hobby.

Question 3

How is profit-seeking is presumed? When this presumption is made, who has a proof of burden to say it’s a hobby?

Answer 3

If profit in 3 of last 5 years.

IRS.

Question 4

When profit-seeking presumption is not met, it is a hobby. Who has a proof of burden to challenge it?

Answer 4

TP.

Question 5

Are expense of a hobby deductible?

Answer 5

Yes only to the extent of income.

Question 6

What are the order expenses related to a hobby must be deducted?

Answer 6

1. Items that would have been deductible anyway.
2. Other cash expenses.
3. Depreciation.

Question 7

Hobby: where is the revenue reported on?

Answer 7

Page 1 of Form 1040 as other income.

Question 8

Hobby: What are deduction classification for cash expenses and depreciation expenses?

Answer 8

2% misc itemized deductions.

Question 9

When are expenses for a home office deductible?

Answer 9

If it is used exclusively on a regular basis as either;

• The principal place of business for a trade/business of the TP or
• A place of business used by clients, patients, or customers, and
• The use is for the convenience of the employer (if employed).

Question 10

Home office deduction: Limit?

Answer 10

Limited to income from the business less all other business expenses.

Question 11

Home office deduction: What happens to any disallowed expenses?

Answer 11

Carry forward indefinitely.

Question 12

Home office deduction: Deduction order?

Answer 12

Same as hobby.

1. Items that would have been deductible anyway.
2. Other cash expenses.
3. Depreciation.

Question 13

Home office deduction: what is safe harbor? Maximum?

Answer 13

Multiply the allowable square footage by $5.

The maximum square footage is 300 - $1,500.

Question 14

Vacation homes: What’s the criteria to be treated as a personal residence?

Answer 14

If rented for less than 15 days a year.

Question 15

Vacation homes: personal residence: Tax implications for rent income? Mortgage interest and property taxes deduction allowed?

Answer 15

It is excluded from income.

Yes, on Schedule A.

Question 16

Vacation homes: when it is rented for 15 days or more, how must TP determine the significance of personal use?

Answer 16

If it is not used for personal purposes for more than the greater of;
*14 days or *10% of the total days rented.

Question 17

Vacation homes: personal use NOT significant + more than 15 days rental (primary rental): Tax treatment of rent income? Is a rental loss allowable?

Answer 17

All rent is taxable, net of al regular rental expenses, prorated for the percentage of rental days only.
Yes, rental loss is allowed.

Question 18

Vacation homes: how is personal/rental property classified?

Answer 18

When rented for 15 days or more and if it is personally used more than the greater of;
*14 days or *10% of the total days rented.

Question 19

Vacation homes: personal use significant + more than 15 days rental (personal/rental): Tax treatment of rent income? Is a rental loss allowable? Expense deduction order?

Answer 19

All rent is taxable, net of al regular rental expenses, prorated for the percentage of rental days only.
A rental loss is not allowed.

Same as hobby.

1. Items that would have been deductible anyway.
2. Other cash expenses.
3. Depreciation.

Question 20

Passive losses: can they offset earned income or portfolio income (i.e. investment income) or passive income?

Answer 20

No to first 2.

Yes to passive income.

Question 21

Passive losses: what is it? 2 examples?

Answer 21

Those TP does not materially participate.

Most rental activities, any limited partnership interest regardless of TP’s actual participation.

Question 22

What are 3 income types?

Answer 22

Portofolio, active, and passive.

Question 23

What are 2 criteria to determine material participation?

Answer 23

1. Work more than 500 hrs in the activity

2. Work more than 100 hours if no other individual works more than 100 hours.

Question 24

Passive losses: When can this offset active and portfolio income? Max? Phase out limit?

Answer 24

When a TP “actively participates” (key decision maker) in a rental real estate activity AND own 10% or more during the entire year.
Max: $25,000.
Phase out: Modified AGI of $100,000 and $150,000 (same for individuals and married) (deduction only allowed if it’s less than $150,000) - excess of over $100,000 - 50% of excess will be reduced from deduction.

Question 25

Passive losses: what happens to excess passive loss?

Answer 25

Can;

• be carry forward to offset passive income.
• to offset ANY gain or increase the lose when the passive activity is disposed of in a fully taxable transaction.

Question 26

Real estate professionals: what can they deduct against other income others can’t? Will this have a cap of $25,000?

Answer 26

Deduct rental real estate losses against other income.

No.

Question 27

What are 2 criteria to be “real estate professionals”?

Answer 27

1. Perform more than 50% of his or her personal services in trades or businesses involving real property AND
2. Perform more than 750 hours of services in real property trades or businesses in which he or she materially participates.

Question 28

What is at-risk limitations? To whom does this apply?

Answer 28

Loss deductions are limited to the amount a TP’s has “risk”

To individuals, closely held regular (C) corporations, and personal service corporations.

Question 29

What does amount “at risk” include?

Answer 29

• The cash and adjusted basis of property contributed by a TP.
• Liabilities for which the TP is personally liable, excluding non recourse debt.

Question 30

What is the deduction limitation of investment interests?

Answer 30

limited in its deduction to the lesser of net investment
income or actual investment interest paid.

To maximize the investment interest expense deduction, a taxpayer may elect to include qualified dividends and capital gains as investment income. If the taxpayer chooses to do so, he/she must reduce the amount of qualified dividend and capital gains eligible for the reduced preferential long-term capital gains rate by the same amount included in investment income.

Question 31

What is investment interest?

Answer 31

Investment interest is interest paid on debt borrowed for the purpose of purchasing or continuing to hold investment property.