Tax Chapters 6-9 Flashcards
What are the 3 categories of deductions?
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
Section 212 allows individuals to deduct expenses that the individual incurs for what 3 purposes?
Production of income
Management of property held for income
Tax preparation
Personal expenses are generally deducted for or from AGI?
From AGI
Business expenses are generally deducted for or from AGI?
For AGI
What are the 6 requirements that must be met to deduct business or investment expenses?
Related to a profit-motivated activity Ordinary Necessary Reasonable Properly documented An expense of the taxpayer (not someone else)
What are the 4 business or investment expenditures that a taxpayer cannot deduct?
Capital expenditures
Expenditures related to tax-exempt income
Illegal expenditures
Expenditures specifically disallowed by the tax law
What is the tax treatment of an expense that is in connection with the purchase of an asset?
Capitalize the expense as part of the asset
An expense that is customary in a particular business is known as an ____ expense.
Ordinary
An expense that is appropriate and helpful to the taxpayer’s business is known as a ___ expense.
Necessary
An expense that is reasonable in amount is known as a ____ expense.
Reasonable
If the taxpayer’s mortgage is being paid by his or her parents, who gets the deduction for mortgage interest?
The parents
When should an asset be capitalized?
When it benefits a period beyond the next tax year
If a taxpayer incurs interest in order to purchase tax-exempt securities, is this interest deductible?
No
How much of a taxpayer’s business start-up expenditures (under $50,000) may her or she currently deduct?
$5,000
What is the phase-out amount for business start-up expenditures?
For every dollar spent from $50,000-$55,000, the amount of currently deductible expense is reduced by $1.
What happens to business start-up expenses that are not currently deductible?
They are amortized for 180 months beginning the month the business opens
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?
They are fully deductible in the current year
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?
They are not deductible
When are expenses generally deductible under the cash method?
When paid
When is a credit card charge deductible for a cash method taxpayer?
When the charge is made
If goods are purchased on an open account with a vendor, when is the expense for these goods deductible?
When the invoice is paid
What is the tax treatment of deductible prepaid expenses?
They are capitalized and amortized over their useful lives
What are the 2 conditions required for a prepaid expense be currently deductible?
If the prepayment is required by a contract and the period benefitted is not longer than a year.
What sort of prepaid interest is currently deductible?
Points paid on a loan for the acquisition or improvement of a principal residence.
Are points paid in connection with a mortgage refinance currently deductible?
No
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
When a taxpayer uses up property, when is the expense deductible under the accrual method?
As the taxpayer uses the property
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
When is the all-events test satisfied?
When the liability is established
When the amount of the liability is determined
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
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.
What are the 2 main types of related parties?
Family members
Individuals who own over 50% of a company’s stock
Stock owned by and individuals’ family is treated as though it is owned by ______.
The individual
If a taxpayer sells property to a related party at a loss, what is the tax treatment of the loss?
The loss is disallowed
When a taxpayer purchases property from a related party, what is the taxpayer’s basis in the property?
The amount paid
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
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
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
What is a hobby?
An activity not engaged in for profit
How may a taxpayer establish that an activity is not a hobby?
With a business plan
How often must an activity generate a profit for it to be considered a business rather than a hobby?
3 out of 5 years
In what order do hobby expenses or vacation home expenses offset gross income?
- Property Taxes & Interest
- Everything else except depreciation
- Depreciation
What is the maximum amount a taxpayer can deduct for hobby losses?
Up to the amount of the income produced by the hobby
To what extent may miscellaneous itemized deductions be deductible, in regards to AGI?
Only when they exceed 2% of AGI
What is the tax treatment of hobby losses in excess of hobby income?
They are not deductible and not carried over
If depreciation for a hobby loss cannot be deducted, is the basis for the asset still adjusted by the amount of the depreciation?
No
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
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
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
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
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
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
If a dwelling unit is a combination property, what is the limit of the deductions?
The gross income from the property
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
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
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
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
Personal expenses allowed to be deducted by a provision in the law are ____.
Itemized deductions
What are the 6 categories of itemized deductions?
Medical expenses Taxes Interest Charitable contributions Casualty/Theft losses Miscellaneous deductions
To deduct medical expenses, taxpayers must pay the expenses on behalf of who?
Themselves
Spouse
Children
Is over-the-counter medication a deductible medical expense?
No
Is prescription medication a deductible medical expense?
Yes
Is cosmetic surgery a deductible medical expense?
No
What is the per mile deduction for transportation essential to medical care?
24 cents
What percentage of meal expenses are deductible en route to a medical facility?
50%
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
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
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
If structural barriers in the home of a physically disabled individual are removed, how much of that expense can be deducted?
All of it
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)
A mandatory assessment for the purpose of raising revenue for public or government purposes is called a ___.
Tax
A mandatory assessment for the purpose of providing privileges or services is called a ___.
Fee
