Tax Chapters 6-9 Flashcards
1
Q
What are the 3 categories of deductions?
A
Expenses incurred in connection with a trade or business
Expenses incurred by an individual in connection with the production of income
Other types of expenses that are specifically deductible under the internal revenue code
2
Q
Section 212 allows individuals to deduct expenses that the individual incurs for what 3 purposes?
A
Production of income
Management of property held for income
Tax preparation
3
Q
Personal expenses are generally deducted for or from AGI?
A
From AGI
4
Q
Business expenses are generally deducted for or from AGI?
A
For AGI
5
Q
What are the 6 requirements that must be met to deduct business or investment expenses?
A
Related to a profit-motivated activity Ordinary Necessary Reasonable Properly documented An expense of the taxpayer (not someone else)
6
Q
What are the 4 business or investment expenditures that a taxpayer cannot deduct?
A
Capital expenditures
Expenditures related to tax-exempt income
Illegal expenditures
Expenditures specifically disallowed by the tax law
7
Q
What is the tax treatment of an expense that is in connection with the purchase of an asset?
A
Capitalize the expense as part of the asset
8
Q
An expense that is customary in a particular business is known as an ____ expense.
A
Ordinary
9
Q
An expense that is appropriate and helpful to the taxpayer’s business is known as a ___ expense.
A
Necessary
10
Q
An expense that is reasonable in amount is known as a ____ expense.
A
Reasonable
11
Q
If the taxpayer’s mortgage is being paid by his or her parents, who gets the deduction for mortgage interest?
A
The parents
12
Q
When should an asset be capitalized?
A
When it benefits a period beyond the next tax year
13
Q
If a taxpayer incurs interest in order to purchase tax-exempt securities, is this interest deductible?
A
No
14
Q
How much of a taxpayer’s business start-up expenditures (under $50,000) may her or she currently deduct?
A
$5,000
15
Q
What is the phase-out amount for business start-up expenditures?
A
For every dollar spent from $50,000-$55,000, the amount of currently deductible expense is reduced by $1.
16
Q
What happens to business start-up expenses that are not currently deductible?
A
They are amortized for 180 months beginning the month the business opens
17
Q
If a business owner opens a new branch of his business, what is the tax treatment for the start-up expenses for the new branch?
A
They are fully deductible in the current year
18
Q
If a taxpayer incurs start-up expenses for a new business, but does not enter the business, what is the tax treatment for these expenses?
A
They are not deductible
19
Q
When are expenses generally deductible under the cash method?
A
When paid
20
Q
When is a credit card charge deductible for a cash method taxpayer?
A
When the charge is made
21
Q
If goods are purchased on an open account with a vendor, when is the expense for these goods deductible?
A
When the invoice is paid
22
Q
What is the tax treatment of deductible prepaid expenses?
A
They are capitalized and amortized over their useful lives
23
Q
What are the 2 conditions required for a prepaid expense be currently deductible?
A
If the prepayment is required by a contract and the period benefitted is not longer than a year.
24
Q
What sort of prepaid interest is currently deductible?
A
Points paid on a loan for the acquisition or improvement of a principal residence.
25
Are points paid in connection with a mortgage refinance currently deductible?
No
26
When a taxpayer is provided with property or services, when is the expense deductible under the accrual method?
When the taxpayer receives the property or services
27
When a taxpayer uses up property, when is the expense deductible under the accrual method?
As the taxpayer uses the property
28
When a taxpayer owes services or property to another person, when is the amount deductible under the accrual method?
When the taxpayer provides the property or services
29
When is the all-events test satisfied?
When the liability is established
| When the amount of the liability is determined
30
When does the "Wash Sale Rule" apply?
When stock is sold at the end of the year, and nearly identical stock is purchased within 61 days
31
If stock is sold at the end of the year for $9,000 and repurchased within 61 days for $1,000, what is the tax treatment? (Gain or loss? Adjustments to basis?)
No recognized loss. The basis is adjusted to $10,000.
32
What are the 2 main types of related parties?
Family members
Individuals who own over 50% of a company's stock
33
Stock owned by and individuals' family is treated as though it is owned by ______.
The individual
34
If a taxpayer sells property to a related party at a loss, what is the tax treatment of the loss?
The loss is disallowed
35
When a taxpayer purchases property from a related party, what is the taxpayer's basis in the property?
The amount paid
36
If a taxpayer sells property to a related party at a loss, and the related party later sells the property at a gain, what is the tax treatment of the previously unrecognized loss?
The amount of the gain is reduced by the original unrecognized loss
37
If a taxpayer sells property to a related party at a loss, and the related party later sells the property at a loss, what is the tax treatment of the previously unrecognized loss?
It remains unrecognized
38
When can an accrual method taxpayer take a deduction for money they owe to a cash method related party?
When the cash method related party recognizes the income
39
What is a hobby?
An activity not engaged in for profit
40
How may a taxpayer establish that an activity is not a hobby?
With a business plan
41
How often must an activity generate a profit for it to be considered a business rather than a hobby?
3 out of 5 years
42
In what order do hobby expenses or vacation home expenses offset gross income?
1. Property Taxes & Interest
2. Everything else except depreciation
3. Depreciation
43
What is the maximum amount a taxpayer can deduct for hobby losses?
Up to the amount of the income produced by the hobby
44
To what extent may miscellaneous itemized deductions be deductible, in regards to AGI?
Only when they exceed 2% of AGI
45
What is the tax treatment of hobby losses in excess of hobby income?
They are not deductible and not carried over
46
If depreciation for a hobby loss cannot be deducted, is the basis for the asset still adjusted by the amount of the depreciation?
No
47
If a dwelling unit is used by the taxpayer for at least 14 days and rented out for 14 days or less, is this a residence, rental property, or a combination?
Residence
48
If a dwelling unit is used by the taxpayer for 14 days or less and rented out the rest of the time it is in use, is this a residence, rental property, or a combination?
Rental property
49
If a dwelling unit is used by the taxpayer for over 14 days and rented out for over 14 days, is this a residence, rental property, or a combination?
Combination
50
If a dwelling unit is used by the taxpayer for more than 10% of the total time it is in use, and rented out for 14 days or less, is this a residence, rental property, or a combination?
Residence
51
If a dwelling unit is used by the taxpayer for less than 10% of the total time it is in use and rented out for the rest of the time it is in use, is this a residence, rental property, or a combination?
Rental property
52
If a dwelling unit is used by the taxpayer for over 10% of the total time it is in use, and rented out for at least 14 days, is this a residence, rental property, or a combination?
Combination
53
If a dwelling unit is a combination property, what is the limit of the deductions?
The gross income from the property
54
Under what 3 conditions is a dwelling unit considered to be used for the taxpayer's personal purposes?
If the taxpayer uses the property
If the taxpayer's family uses the property
If the property is rented for less than fair value
55
What is the allocation formula used to allocate expenses between the personal use and rental use of a property?
(Number of rental days / Total days) x total expenses
56
When calculating the allocation of interest and property taxes between personal use and rental use of a property, what is considered "total days" in the allocation formula?
365
57
When calculating the allocation of expenses (other than interest and taxes) between personal use and rental use of a property, what is considered "total days" in the allocation formula?
The number of days the property was in use
58
Personal expenses allowed to be deducted by a provision in the law are ____.
Itemized deductions
59
What are the 6 categories of itemized deductions?
```
Medical expenses
Taxes
Interest
Charitable contributions
Casualty/Theft losses
Miscellaneous deductions
```
60
To deduct medical expenses, taxpayers must pay the expenses on behalf of who?
Themselves
Spouse
Children
61
Is over-the-counter medication a deductible medical expense?
No
62
Is prescription medication a deductible medical expense?
Yes
63
Is cosmetic surgery a deductible medical expense?
No
64
What is the per mile deduction for transportation essential to medical care?
24 cents
65
What percentage of meal expenses are deductible en route to a medical facility?
50%
66
What is the limit for deductible lodging expenses when the lodging is required in order for the taxpayer to receive medical care?
$50 per night
67
If an asset is acquired for the sole purpose of helping a sick or handicapped person, and the asset cannot be used for any other purpose, how much of that expense can be deducted?
All of it
68
If an asset is acquired to provide medical care for a sick or handicapped person, but the asset also permanently improves the taxpayer's residence (such as a swimming pool), how much of that expense can be deducted?
The amount in which the cost of the improvement exceeds the increase in the residence's FMV
69
If structural barriers in the home of a physically disabled individual are removed, how much of that expense can be deducted?
All of it
70
What threshold must be met in order for the taxpayer's medical expenses to be deductible?
The medical expenses must exceed 10% of AGI (the first 10% is not deductible)
71
A mandatory assessment for the purpose of raising revenue for public or government purposes is called a ___.
Tax
72
A mandatory assessment for the purpose of providing privileges or services is called a ___.
Fee
73
When are refunds of state income tax not added to the taxpayer's AGI?
When the taxpayer takes the standard deduction in the previous year
74
A taxpayer may elect to either deduct state and local income taxes, or ____.
State and local sales taxes
75
What are the 2 requirements that need to be met in order for a personal property tax to be deductible?
The tax must be imposed annually
The tax must be based on the value of the property
76
Is a vehicle license fee deductible?
Yes
77
If real estate is sold, what is the treatment of the property tax deduction?
It is allocated between the seller and purchaser based on how long each of them own the property
78
How is the deductibility of interest generally determined?
By the use of the loan proceeds
79
What are the 6 categories of interest?
```
Interest incurred in an active trade or business
Interest incurred in a passive activity
Student loan interest
Investment interest
Qualified residence interest
Personal interest
```
80
Which categories of interest are deductible FOR AGI?
Interest incurred in an active trade or business
Interest incurred in a passive activity
Student loan interest
81
Which categories of interest are deductible FROM AGI?
Investment interest
| Qualified residence interest
82
Which category of interest is not deductible?
Personal interest
83
What is the limit on interest incurred in an active trade or business?
No limit
84
What is the limit on interest incurred in a passive activity?
It may only be deducted against the passive activity income
85
What is the limit on investment interest?
Net investment income
86
What is net investment income
The excess of investment income over investment expenses
87
If an investment interest deduction is limited, what happens to the excess?
It is carried over
88
What are the 5 sources of investment income?
```
Dividends
Interest
Annuities
Net short term capital gains
Royalties
```
89
Are qualified dividends a form of investment income?
No, they are net long term capital gains
90
When is acquisition indebtedness incurred?
When a qualified residence is acquired or improved
91
When is home equity indebtedness incurred?
When a loan is secured by a qualified residence and the proceeds are used for anything other than improving the residence
92
What is the limitation (per taxpayer) on total deductible acquisition indebtedness?
$1,000,000
93
What is the limitation (per taxpayer) on total deductible home equity indebtedness?
The lesser of $100,000 or the FMV in excess of acquisition indebtedness
94
What is any qualified residence indebtedness that exceeds $1,100,000?
Personal indebtedness, not deductible
95
How many qualified residences may a taxpayer have?
2
96
For a second residence to be considered a qualified residence, for how many days must the taxpayer use it?
the greater of 14 days or 10% of the total time it is used
97
What is the maximum annual interest deduction for student loans?
$2,500
98
At what range of AGI is the deductibility of student loan interest either partially or fully phased out for a single taxpayer?
$60,000-$75,000
99
At what range of AGI is the deductibility of student loan interest either partially or fully phased out for a married (filing jointly) taxpayer?
$125,000-$155,000
100
How is the phase-out rate for student loan interest calculated for a single taxpayer?
The amount by which the taxpayer's income exceeds $60,000 divided by $15,000
101
How is the phase-out rate for student loan interest calculated for a married (filing jointly) taxpayer?
The amount by which the taxpayer's income exceeds $125,000 divided by $30,000
102
What 2 questions need to be answered to determine the deductibility of a charitable contribution?
Is the charity a qualified organization?
| What type of property is donated?
103
What are the 2 types of property that can be donated to a charity?
```
Long-term capital gain property
Ordinary property (everything else)
```
104
What are the 2 possible values of a contribution?
Fair market value
| Fair market value minus gain, if any
105
What is the most common long-term capital gain property donated to charity?
Stock
106
In general, what is the value of a contribution of long-term capital gain property?
Fair market value
107
In what 3 situations is gain (if any) subtracted when valuing a contribution of long-term capital gain property?
Contributions to private non operating foundations
Contributions of unrelated use property
Contributions of certain intangibles
108
What is the most common type of unrelated use property donated to charity?
Collectibles
109
When is a charitable contribution considered an unrelated use property?
When it is not used by the charity for the charity's tax-exempt purpose
110
What is the value of ordinary property contributed to charity?
Fair market value minus gain (if any)
111
What may a taxpayer deduct when he or she donates services to a charity?
Unreimbursed expenses
112
If a long-term capital gain property is donated to charity, what is the AGI limit for the contribution?
30% of AGI
113
What is the tax treatment of money or property donated to a charity that exceeds the taxpayer's AGI limit?
The excess is carried forward for up to 5 years
114
If ordinary property is donated to charity, what is the AGI limit for the contribution?
50% of AGI
115
If cash is donated to charity, what is the AGI limit for the contribution?
50% of AGI
116
What 2 conditions must a loss meet for it to be deductible?
It must be realized and recognized
117
What are the 3 main requirements for a stock to be Section 1244 stock?
It must have been originally acquired in exchange for cash or property
It must be stock in a small business
It must be stock in an active business
118
What is the character of Section 1244 stock losses?
Up to $50,000 - Ordinary
Over $50,000 - Long-term capital losses
(doubled for married filing jointly)
119
What is limit on currently deductible passive activity losses?
The amount of passive activity income
120
What is the tax treatment of the disposition of a passive activity with suspended losses?
The losses may be used to offset other income after they are used against passive activity income.
121
What is the tax treatment of losses from an active activity that used to be passive?
The losses may be used to offset active business income after they are used to offset current year income from the same activity.
122
What is a passive activity?
A trade or business in which the taxpayer does not materially participate (or a rental real estate activity).
123
How may a taxpayer group activities?
The taxpayer may group them however he or she wants to, but the decision is permanent.
124
What is material participation in an activity?
Participation on a regular, continuous, and substantial basis
125
What are the 2 requirements for a taxpayer to deduct losses from rental real estate from other income?
The taxpayer must actively participate
The taxpayer must own at least 10%
126
How high is the threshold for a taxpayer to be considered an "active participant" in a rental real estate activity?
Very low
127
What can a taxpayer do with excess losses from a rental real estate activity, after they are used to offset passive activity income?
Other income may be offset up to $25,000 (minus 50% of AGI in excess of $100,000)
128
What is a suspended loss?
A passive activity loss that has been carried over from a previous year
129
What type of event is considered a casualty?
Sudden, unexpected, unusual
130
How is the amount of a casualty loss determined?
The lesser of the decline in fair market value or the taxpayer's adjusted basis (minus insurance proceeds)
131
How much of a casualty loss is deductible?
The amount of the loss minus $100 minus 10% of AGI
132
What are the 2 major requirements for a bad debt to be deductible?
It must be a bona fide debt
| The taxpayer must have basis in the debt
133
In general, can a cash method taxpayer claim a deduction for a bad debt?
No
134
Under what circumstance can an accrual method taxpayer claim a deduction for a bad debt?
If the goods or services have already been provided and the amount billed for them was included in the taxpayer's income
135
What is the difference in accounting for bad debts between GAAP and tax?
GAAP uses an allowance method
Tax uses a direct write-off method
136
For a business bad debt, does the debt need to be completely worthless or only partially worthless to get the deduction?
Partially worthless
137
For a non business bad debt, does the debt need to be completely worthless or only partially worthless to get the deduction?
Completely worthless
138
What is the character of a nonbusiness bad debt?
Short term capital loss
139
When does a Net Operating Loss occur?
When business expenses exceed business income
140
Are salary and wages included when determining the amount of business income involved in computing a Net Operating Loss?
Yes
141
What is the best indicator of a net operating loss?
A negative AGI
142
What is the tax treatment of a net operating loss?
The loss is carried back 2 years, then carried forward 20 years
143
What are the 2 classifications of employee expenses?
Reimbursed and unreimbursed
144
Are reimbursed employee expenses deductions for or from AGI?
For AGI
145
Are unreimbursed employee expenses deductions for or from AGI?
from AGI
146
What is the limit on unreimbursed employee expenses?
A nondeductible floor of 2% of AGI
147
What is "travel"?
Being away from home overnight
148
Where is the taxpayer's home?
The location of his or her principal place of employment
149
If a taxpayer expects to be away from home for work for under a year, is this considered temporary or indefinite travel?
Temporary
150
If a taxpayer expects to be away from home for over a year, but ends up being away from home for under a year, is this considered temporary or indefinite travel?
Indefinite
151
If a taxpayer expects to be away from home for under a year, but after several months, learns he or she will be away from home for over a year, is this considered temporary or indefinite travel?
The point up until the change of plans is considered temporary, and the remainder is considered indefinite
152
Are temporary business travel expenses deductible?
Yes
153
Are indefinite business travel expenses deductible?
No
154
What are the 2 ways to calculate business-related automobile expenses?
1. Actual expenses
| 2. Standard mileage rate plus parking and tolls
155
What percentage of business meals and entertainment are deductible?
50%
156
What are the 2 criteria for determining if meals and entertainment expenses are deductible?
If they are directly related to or associated with business.
157
If a meal or entertainment directly follows a business meeting, is it deductible, even if no business is discussed?
Yes
158
Are meals and entertainment in which no business is discussed deductible if they foster goodwill?
No
159
Are Chamber of Commerce dues deductible?
Yes
160
Are Country Club dues deductible if the club is used exclusively for business?
No
161
What is the limitation for business gifts to be deductible?
Under $25
162
When are moving expenses deductible?
When the taxpayer has a new job in which the commute is extended by at least 50 miles from his or her previous residence.
163
For how long must an employee work at a new job in a new location in order for his or her moving expenses to be deductible?
Full time for 39 weeks out of the 12 months following the move
164
Are deductible moving expenses deductions for or from AGI?
For AGI
165
What is the main requirement for a home office to be tax deductible?
It must be exclusively used for business on a regular basis.
166
What 3 ways can a home office be deductible if it is exclusively used for business?
If it is the principal place of business
If it is where the taxpayer meets with clients
If it is a separate structure from the home
167
When can an employee deduct home office expenses?
When the home office is for the convenience of the employer
168
What 2 criteria must be met for a home office to be considered a principal place of business?
It must be used for administrative or management activities
There must be no other fixed location for administrative or management activities to be done
169
What is the cap on home office expense deductions?
The income from the activity that remains after direct expenses are subtracted
170
What happens to deductible home office expenses that exceed the cap?
They are carried over
171
Are the contributions to a traditional IRA deductible?
Yes
172
Are the distributions from a traditional IRA tax-free?
No
173
What 2 requirements must be met for a contribution to a traditional IRA to be deductible?
It must be $5,500 or less (per spouse)
| It must come out of earned income
174
What is the effect on the deductibility of traditional IRA contributions if the taxpayer is an active participant in an employee-sponsored retirement plan?
There is an AGI phaseout
175
Are contributions to a traditional IRA deductions for or from AGI?
For AGI
176
What is the character of withdrawals from a traditional IRA?
Ordinary income
177
Are contributions to a Roth IRA deductible?
No
178
Are withdrawals from a Roth IRA tax-free?
Yes
179
How much may a taxpayer contribute to a Roth IRA each year?
$5,500 per spouse
180
Is there any penalty for withdrawing contributions to a Roth IRA before 5 years have elapsed?
No
181
Is there any penalty for withdrawing earnings from a Roth IRA before 5 years have elapsed?
Yes. a 10% penalty.
182
When are the withdrawals of earnings from a Roth IRA taxable?
When they are non-qualifying withdrawals
