Restrictions on deductions Flashcards
If you invest in a tax shelter . . .
Must file an 8966 that identifies and discloses investment in the tax shelter
If you don’t file, 75% of additional tax penalty
(T/F) can you deduct entertainment expenses related to business activities?
No. S 274 limits business deductions by disallowing
(1) entertainment activities
(2) club dues (country clubs or other entertainment venues)
(3) expenses associated with an entertainment facility
(4) Expenses of spouse or dependent accompanying taxpayer on a business trip
When can you deduct travel, lodging, and meals?
Travel if majority of the trip is spent on business
- (time important factor)
- Unclear if a “week” is a 5 or 7 day week
Lodging and meals deductible for business purposes (meals 50% haircut)
If a charge for entertainment, such as a box at a sports event, includes meals, are the meals deductible?
Only if the charges are listed separately on the receipt (or charged separately on their own receipt)
What two deductions are not limited by “activities engaged in for profit?”
Taxes (upt to the 10g limit) and mortgage interest.
Rebuttable presumption that the activity is engaged in for profit if
Profitable for 3 out of the last 5 years, or
2 out of the last 7 years for equine businesses
If there is no presumption, can the taxpayer still show they are engaged in the activity for profit?
Yes. Using the factors in Reg 1.183-2(b) and in Engdahl.
(1) Manner engaged in the activity
- recordkeeping
- similarity to for-profit business
- any changes to increase profitability
(2) expertise in the activity
(3) time and effort spent
(4) any expectation assets will appreciate
(5) the individual’s success in engaging in other activities;
(6) profit or loss history;
(7) any occasional profit earned;
(8) the individual’s financial status; and
(9) whether the individual engages in the activity at all for leisure
If an activity is determined to be NOT for profit, can deductions still be taken?
Yes, but they are now limited by the amount that GI exceeds the deductions taken on taxes and mortgage interest.
Ie. can’t take a loss for the year
What is a good “last ditch” argument when a lack of profitability causes the taxpayer to fail the presumption of engaged in for profit?
Bad luck
How does S 465, Deductions limited to amount at risk, work?
For trade/business (162) or production of income (212)
- Can only deduct up to the amount “at risk”
- Losses reduce the amount the taxpayer is “at risk” in subsequent years to the extent of the loss deduction previously allowed, however,
- disallowed losses can be carried forward
What makes up an amount “at risk”?
(1) Cash
(2) Adjusted basis of property
(3) any amounts borrowed that taxpayer is personally liable for, and
(4) FMV of any pledged property, other than that used in the activity as security
What is explicitly not at risk?
(1) Nonrecourse loans, and
(2) Amounts borrowed from
- a person having an interest in the activity, or
- from anyone “related” to such persons
exception for nonrecourse loans in real estate
What is the exception for nonrecourse loans in real estate financing?
Nonrecourse real estate financing is at risk if the financing is from
(1) the government,
(2) is guaranteed by the government, or
(3) is from a qualified person who is in the business of lending money (not related to)
- taxpayer
- seller
- person receiving a fee for taxpayer’s investment
When is the “qualified person” requirement, regarding at risk nature of nonrecourse real estate financing, waived?
if the terms of the nonrecourse financing are
(1) commercially reasonable and
(2) on substantially the same terms as loans involving unrelated persons
Can you deduct losses from passive activities as they are recognized?
No, but passive losses can:
(1) reduce passive income
(2) carry forward, and
(3) become deductible upon sale of entire interest
Any such deduction applies in this order:
(1) income from passive activity,
(2) other passive income, then
(3) other income
What is explicitly not passive income, that might otherwise seem passive?
Portfolio Interest
Activities in which the taxpayer materially participates are not passive.
Material participation is:
(1) Regular
(2) Continuous, and
(3) Substantial
but the reg lists explicit ways
The explicit methods to show material participation
(1) More than 500 hours per year,
(2) The taxpayer makes up substantially all of the participation,
(3) More than 100 hours, and not less than anyone else, or
(4) The aggregate hours of “significant activities,” those 100 hours or more, exceeds 500 hours
What is a reg on material participation that the professor thinks is outside the scope of the code?
The taxpayer must work a minimum of 100 hours per year for material participation to be found
may be situation where under 100 hours, but nevertheless is regular, continuous, and substantial
What counts as “per se NON-material participation?”
Status as a limited partner
Do the actions of agents count as material participation?
No
How can taxpayer use grouping to effectively reduce taxable income?
You can group a passive activity with an active activity to use passive losses to reduce income
material participation can change, but grouping can’t
This means plan using expectations:
- long term loser group with active
- short term loser
(a) lessen participation in a winner, to make passive and have passive income to reduce, or
(b) start another more profitable passive activity
Activities can only be grouped if they are “an appropriate economic unit”?
Factors include:
(1) Similarities and differences in the types of trades/businesses,
(2) Extent of common control,
(3) Extent of common ownership,
(4) Geographical location, and
(5) Interdependencies
Drug trafficker reports income from drug trafficking, seeks to deduct related expenses
No deductions for expenses related to drug trafficking (S 280E)
For tax purposes, what is COGS?
Gross income is sales less cost of goods sold
** COGS is an offset against income, and is NOT available as a deduction**
If a business engages in drug trafficking, can they still take deductions for normal business activities?
Yes.
(1) separate their ordinary business activities from drug trafficking activities for the sake of determining taxable income, and
(2) Deductions may be taken against the ordinary, and non drug related, business activities
When are legal expenses deductible?
If the source is the taxpayer’s business activities
