Chapter 6 Flashcards
What are AGI below the line deductions?
Schedule A for itemization, standard deduction, 20% QBI.
Deductible losses must be incurred in what to be recognized?
Business or Transaction entered into for intended profit. You cannot deduct losses from personal life.
How do the methods of accounting effect when deductions are taken?
Cash method: expenses are incurred when paid
Accrual method: Expenses deductible when incurred
What is the pain and pleasure analogy and how does it influence deductions?
Pain is losing money, having to pay taxes. Pleasure is gaining/keeping money from deductions etc.
If you make photocopies for your client for $10, how much does it cost you at a MTR of 40%?
$6 because it is a business related expense. Taxable income decreases by $10 meaning taxes paid decreases by $4 on other income.
What are disallowed deductions?
Personal Expenditures
Illegal activities and violation of public policy - Permanent BTD
What is a hobby?
Activity not entered into for profit (personal pleasure) Schedule C not necessary
How is profit from a hobby treated?
If entered to make profit general tax rules apply but not greater than excess of income from hobby. If activity shows profit 3/5 years assume that its a business
Can you deduct hobby expenditures
No. they are different than business expenditures and cannot be deducted from taxable income
Can you deduct a transaction to a related party
No deductions are allowed on assets sold to related parties.
When can you deduct a transaction in terms of related parties?
When it leaves the family. Loss is deferred
You sell a piece of art at a loss to a family member or corporation you own, how does this influence your taxes?
You can not deduct the loss until it leaves the family. If it was sold at a profit you could record the gain.
What is the “fruit and tree” analogy
All income made by the owner of the underlying asset belongs to them.
You own Gamestop stock, in order to take a deduction you sell it to your own corporation. Why is or isn’t this allowed?
This is not allowed because you are selling it to a related party and indirectly own the stock. The IRS does not allow you to take a deduction from this transaction.
Why can’t you deduct the expenses paid for a family members mortgage?
No deductions is allowed for me paying another taxpayer’s expense. Can’t assign expenses. (exception is payment of medical expense)
