Deductions

Question 1

Trade or Business Activities - what you do as an employee

Answer 1

Deductible if:

1. Related to the business
2. Ordinary, necessary, and reasonable

Question 2

Investment Activities - stocks, bonds, etc

Answer 2

1. Ordinary, necessary, and reasonable
2. Management or maintenance of property
3. Expense incurred to determine the tax

Question 3

Personal Activities

Answer 3

Not deductible unless a special rule

Question 4

Disallowed Deductions

Answer 4

• Exec compensation for CEO and 4 other highest paid execs that exceed $1M each (unless based on performance based plan)
• Lobby expenses at state and fed level
• Expenses to generate tax-exempt income
• Political contributions
• fines, penalties, bribes (expenses against public policy)
• Expenses of operating an illegal business (except: COGS deductible for illegal drug business)

Question 5

Deductions for AGI

Answer 5

1. Moving Expenses
2. Interest on Student loans
3. Alimony
4. One-half S/E taxes
5. Health Insurance premiumns - 100% deductible for S/E individuals
6. IRA and other retirement contributions
7. Qualified higher education expenses
8. Forfeiture penalties (i.e. cashing a CD early)

Question 6

Itemized Deductions

Answer 6

1. Medical Expenses - 10% AGI rule (4. 7.5% for age 65+)
2. Taxes
3. Interest Expense
4. Charitable Contributions - up to 50% AGI, 30% for LTCG prop (carry forward 5 years)
5. Casualty Losses - over 10% AGI
6. 2% Misc Itemized deducts
7. Other Misc Deducts (not subject to 2% AGI)

Question 7

Net Operating Losses

Answer 7

• Carried back for 2 years, forward for 20 years

- Business and casualty losses only

Question 8

Vacation homes

Answer 8

Personal property
   - Rented for less than 15 days/year
   - rent income excluded
   - interest and taxes are deductible
Rental property
   - Rented for 15 days or more, and NOT USED for personal puposes for the greater of 14 days or 10% of total days rented
    - Rental income taxable
    - Rental loss allowable
Personal/Rental property
   - rented for 15 days+, and used for personal use for the greater of 14 days or 10%
   - regular expenses are pro-rated
   - Rental losses not allowed
   - Expenses deducted is same order as hobby

Question 9

Hobby losses

Answer 9

• If personal, losses not deductible
• Expenses are deductible only to the extent of income
• Expenses deducted in following order:
  
  1. Items that would have been deductible anyway
  2. other cash expenses (2% misc deduct)
  3. Depreciation (2% misc deduct)

Question 10

Home Office

Answer 10

• Deduction limited to income from the business
• expenses deducted in same order as hobby losses
• disallowed expenses carried forward indefinitely
  Safe Harbor:
• allowable sq ft x $5
• Max of 300 sqft or $1500

Question 11

Passive losses

Answer 11

• Passive losses only offset passive gains
• TP does not “materially participate”
• If TP “Actively participates” in real estate activity $25k of losses can offset active portfolio income
• Subject to phase out between $100-150k MAGI
• Disallowed losses carried forward