Limitations on Business Deductions

Question 1

Loss from hobbies, are they deductible? How do you define a hobby?

Answer 1

Nope, not deductible.

Hobby: If there is a clear profit motive, then it is NOT a hobby.

Question 2

How do you determine if there is a profit seeking motive for a hobby loss?

Answer 2

Profit seeking motive is presumed if profit in three of the last five years.

Question 3

What are the limits on expenses from a hobby?

Answer 3

Only to the extent of income

Question 4

Expenses related to the hobby are deducted in a specific order. what is that order?

Answer 4

1) items that would have been deductible anyway, even without a hobby
2) Other cash expenses
3) Depreciation

Question 5

Where is the revenue from a hobby reported?

Answer 5

Form 1040

Question 6

Where do the expenses for a hobby go?

Answer 6

They don’t really go anywhere because 2% itemized deductions.

Question 7

Home office expenses are deductible if:

Answer 7

If it is used exclusively on a regular basis as either

• The principle place of business for a trade/business
• A place of business used by clients, patients
• For the convenience of the employer (if employed)

Question 8

Where does the home office expense go on the tax return?

Answer 8

Schedule C: Self-employed

Employee: Employee business expense (2% Misc. Expense- which are no longer deductible)

Question 9

What are the rules for deducting vacation homes?

Answer 9

• If rented is less than 15 days a year, it is treated as personal residence:
• Rental Income is excluded
• Primarily Rental: It is treated as rental property if rented for more than 15 days or more, and if it is not used for personal purposes for more than the greater of:
• 14 days or,
• 10% of the total days rented

if your personal days do not exceed the number stated above, then your rental use is high.

All the rent that is received is taxable income, the expenses for rental property would be pro-rated between personal and rental.

Rental Loss is allowed

• Personal/Rental:
  If your personal days are more than the number stated above, then it is personal heavy.

All expenses are prorated as above for rental days

Rental Loss is not allowed

Question 10

What are passive losses rules?

Answer 10

Losses from passive activities (i.e. investment income) cannot offset earned income

Question 11

Define a passive activity?

Answer 11

NOT materially participate

Question 12

Define material participation?

Answer 12

More than 500 hours in an activity

100 hours if no other individuals work more than 100 hours

Question 13

What are the passive activity loss rules with respect to those who actively participate in rental real estate activities?

Answer 13

Can deduct up to $25,000 losses against active income or portfolio income.

The deduction phases out between modified AGI of 100,000 and $150,000

Question 14

How long do passive losses last (i.e. how many years can you carry forward?

Answer 14

Indefinite

Question 15

What are the at-risk limitations?

Answer 15

Loss deductions are also limited to the amount a taxpayer has “at risk)

At risk includes;

• The cash and adjusted property contributed by taxpayer
• Liabilities to which taxpayer is personally liable; excludes non-recourse debt