Limitations on Business Deductions Flashcards
Are losses from hobbies deductible?
Considered as personal loss and not deductible.
How is the activity determined either hobby or business?
TP clearly has a profit motive then it’s not a hobby.
How is profit-seeking is presumed? When this presumption is made, who has a proof of burden to say it’s a hobby?
If profit in 3 of last 5 years.
IRS.
When profit-seeking presumption is not met, it is a hobby. Who has a proof of burden to challenge it?
TP.
Are expense of a hobby deductible?
Yes only to the extent of income.
What are the order expenses related to a hobby must be deducted?
- Items that would have been deductible anyway.
- Other cash expenses.
- Depreciation.
Hobby: where is the revenue reported on?
Page 1 of Form 1040 as other income.
Hobby: What are deduction classification for cash expenses and depreciation expenses?
2% misc itemized deductions.
When are expenses for a home office deductible?
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).
Home office deduction: Limit?
Limited to income from the business less all other business expenses.
Home office deduction: What happens to any disallowed expenses?
Carry forward indefinitely.
Home office deduction: Deduction order?
Same as hobby.
- Items that would have been deductible anyway.
- Other cash expenses.
- Depreciation.
Home office deduction: what is safe harbor? Maximum?
Multiply the allowable square footage by $5.
The maximum square footage is 300 - $1,500.
Vacation homes: What’s the criteria to be treated as a personal residence?
If rented for less than 15 days a year.
Vacation homes: personal residence: Tax implications for rent income? Mortgage interest and property taxes deduction allowed?
It is excluded from income.
Yes, on Schedule A.
Vacation homes: when it is rented for 15 days or more, how must TP determine the significance of personal use?
If it is not used for personal purposes for more than the greater of;
*14 days or *10% of the total days rented.
Vacation homes: personal use NOT significant + more than 15 days rental (primary rental): Tax treatment of rent income? Is a rental loss allowable?
All rent is taxable, net of al regular rental expenses, prorated for the percentage of rental days only.
Yes, rental loss is allowed.
Vacation homes: how is personal/rental property classified?
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.
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?
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.
- Items that would have been deductible anyway.
- Other cash expenses.
- Depreciation.
Passive losses: can they offset earned income or portfolio income (i.e. investment income) or passive income?
No to first 2.
Yes to passive income.
Passive losses: what is it? 2 examples?
Those TP does not materially participate.
Most rental activities, any limited partnership interest regardless of TP’s actual participation.
What are 3 income types?
Portofolio, active, and passive.
What are 2 criteria to determine material participation?
- Work more than 500 hrs in the activity
2. Work more than 100 hours if no other individual works more than 100 hours.
Passive losses: When can this offset active and portfolio income? Max? Phase out limit?
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.
Passive losses: what happens to excess passive loss?
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.
Real estate professionals: what can they deduct against other income others can’t? Will this have a cap of $25,000?
Deduct rental real estate losses against other income.
No.
What are 2 criteria to be “real estate professionals”?
- Perform more than 50% of his or her personal services in trades or businesses involving real property AND
- Perform more than 750 hours of services in real property trades or businesses in which he or she materially participates.
What is at-risk limitations? To whom does this apply?
Loss deductions are limited to the amount a TP’s has “risk”
To individuals, closely held regular (C) corporations, and personal service corporations.
What does amount “at risk” include?
- The cash and adjusted basis of property contributed by a TP.
- Liabilities for which the TP is personally liable, excluding non recourse debt.
What is the deduction limitation of investment interests?
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.
What is investment interest?
Investment interest is interest paid on debt borrowed for the purpose of purchasing or continuing to hold investment property.
