Chapter 8 - Other deductions, penalties & loss disallowance Flashcards
9 Factors in hobby determination
- Manner activity is managed
- Time and effort expended
- Expertise of taxpayer and advisors
- Taxpayer’s success in similar activities
- History of profit/loss in similar activities
- Amount of occasional profits generated
- Expectation that assets will increase in value
- Financial status of taxpayer
- Whether personal pleasure dictates involvement
Presumption that taxpayer has a profit motive
Profit in 3 out of 5 years (2 out of 7 years for horses)
For profit activity
deduct expenses above the line
Hobby activity
income included above the line and expenses before 2018 and after 2025 below the line only to the extent of income subject to 2% AGI limitation
Order of deduction
Tier 1 - mortgage interest, property taxes, casualty losses
Tier 2 - other non depreciation expenses
Tier 3 - cost recovery - depreciation
3 types of rental real estate
Non-taxable rental use
Primarily rental use
Mixed use
Non-taxable rental use
rented less than 15 days non taxable - no expenses may be claimed
Primarily rental use
Property is used by the owner for less than the greater of 14 days or 10% of rental days - income is recognized, expenses are deductible
Mixed use
Property is used by owner for more than the greater of 14 days or 10% of rental days - income is recognized, expenses are deductible, hobby loss expenses tier rules apply, unused expenses carried forward
Section 1244 stock
held by original purchaser
initial capitalization of $1,000,000 or less
1244 tax treatment
First $50,000 ($100k MFJ) each year is treated as ordinary loss
Excess losses follow normal capital loss ($3,000)
Does not apply to capital gains
Net operating loss (NOL)
Above the line deduction and can offset future income
Can be carried forward indefinitely
Carryovers are allowed to be claimed in a taxable year up to the lesser of: carryover amount or 80% of taxable income determined without regard to the deduction or NOLs
