Taxes: Limits on Business Deductions

Question 1

Taxes:
Limits on Business Deductions
Hobby Losses

Answer 1

Hobby Losses
- activity primarily taken for enjoyment that generates profit
- expenses deductible to extent of revenues (before 2% AGI limit)
- to avoid hobby, must prove real profit
- 2% miscellaneous itemized deductions
- no carryover
- if profit 3/5 years, IRS must prove hobby
- if losses 3/5, taxpayer must prove hobby
Order
- taxes and interest
- cash expenses
- depreciation

Question 2

Taxes:
Limits on Business Deductions
Business Use of Home

Answer 2

Business Use of Home
- deduction for home office or rental of personal residence
Requirements
- business use is exclusive and regular
- office is principal place of business OR ordinary meeting place for clients
- used for convenience of employer if taxpayer employee
- expenses allocated between part used for business and
- multiply the square footage by $5, Max 300
- same order as hobby losses
- do carry forward and can be used in future

Question 3

Taxes:
Limits on Business Deductions
Business Use of Home
Vacation Home

Answer 3

Vacation Home

• rented less than 15 days per year = personal residence
• 15+ days and not personal for greater of: 1) 14 days or 2) 10% days total rented then treated as rental property
  
  • all rent taxable net of expenses, prorated for # days
  • rental loss is allowable
• if 15+ days and personal for greater of: 1) 14 days or 2) 10% days total rented,
  
  • all regular expenses, prorated for # days
  • NO rental loss is allowable

Question 4

Taxes:
Limits on Business Deductions
Passive Activity Loss Rules

Answer 4

Passive Activity Loss Rules

• losses only offset passive income, and excess suspended
• Definition: profit-seeking activity in which taxpayer does not materially participate in management
  
  • work more than 500 hours, or work more than 100 when no one else works more than 100
  • all limited partners and most rental activities
  • real estate professional must work 50% in activity and must perform 750 hours

Question 5

Taxes:
Limits on Business Deductions
Passive Activity Loss Rules
Rental Real Estate

Answer 5

Rental Real Estate

• exception for taxpayers who actively manage rentals
• Active Participation: own at least 10% of property and significantly participate in decision making
  
  • deduct max loss $25k /year
  • phaseout AGI over $100k at 50% rate until $150k
• suspended losses are deductible in later years or when sold