Gross Income Pt. 2

Question 1

What costs are required to be capitalized?

Answer 1

Direct materials, direct labor, and overhead/applicable indirect costs (utilities, warehousing costs, repairs, maintenance, indirect labor, rents, storage, depreciation/amortization, insurance, pension contributions, engineering and design, repackaging, spoilage/scrap, and administrative supplies)

Question 2

What costs are not capitalized?

Answer 2

Selling, advertising, marketing, general and administrative, research, and officer compensation not attributed to production services

Question 3

What happens when a residence is rented for fewer than 15 days?

Answer 3

It is treated as a personal residence (rental income is excluded from income while depreciation, utilities, and repairs are not deductible). Mortgage interest and real estate taxes are allowed as itemized deductions

Question 4

What happens when a residence is rented for more than 15 days?

Answer 4

Expenses must be prorated between personal and rental use (a different proration method is used for mortgage interest and property taxes than is used for utilities, insurance, depreciation, etc). Rental use expenses are only deductible to the extent of rental income