Federal Taxation III: Deductions Flashcards Preview

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Flashcards in Federal Taxation III: Deductions Deck (27):

Three mutually exclusive categories of activities/transactions

1. Personal
2. Trade/Business
3. Investment


Ordinary and Necessary

the nature of the expenditure is customary and appropriate under the circumstances



an expenditure cannot be extravagant in amount



accounting method used to delay the recognition of expenses by recording the expense as long-term asset


Prepaid interest

must always be amortized over the life of the loan


Capitalize vs Repair

1. Costs capitalized if they increase the property's useful life or adapt it to a new/different use
2. Costs are repairs if they maintain normal operating condition of asset but do not increase its value or lengthen its life


Deductions "for" AGI

primarily business related expenses, and are subject to fewer limits than itemized deductions


Moving Expenses

must be associated with a job change or a first job.

1. new job must add 50 miles to old commute to justify deduction
2. must be active in new job for substantial period after move
3. limited to reasonable amounts paid to move possessions/transport costs. Not meals.


Substantial period of employment

1. Employee: 39 weeks during next 12 months
2. Self-employed: 39 weeks + additional 78 weeks during next 24 months


Student Loan Interest

Deduction limited to $2,500 of interest that is not otherwise deductible


Accountable Plan (substantiated expenses)

If reimbursement is included in income, deduction is FOR AGI

If reimbursement is NOT included in income, NO deduction


Reimbursement not under accountable plan

must be included in income - deduction is a 2% misc itemized deduction


Expenses not reimbursed by employer

deduction is 2% misc itemized deduction


Travel Expenses

Limited to trips with a business purpose


Meals and lodging

Can be claimed when taxpayer is "away from home" overnight


Entertainment (5)

Closely Regulated, limited to 50%

1. must involve someone with business relation
2. substantial discussion must occur (before/during/after on same business day)
3. no deduction for facility/club dues (unless public service, prof. org, trade assoc)
4. deduction for tickets is limited to face value of ticket
5. business gifts limited to $25 per year per donee


Education Expenses

Not deductible if:
1. to meet minimum standards of current job
2. to qualify taxpayer for a new trade or business

Deductible if:
1. to maintain or improve existing skills in current job
2. to meet requirements of employer or imposed by law to retain employment


Deductible Losses

generated through disposition of business (not personal) assets


Deductible Bad Debts

deductible is loan is made in a trade activity.

can only be deducted using write off method


Deductible Non-business bad debts

Any bona fide loan that is not made in a trade capacity, but has bona fide profit motive.

Deductible as short-term capital losses in year of complete worthlessness


Limitation on deduction of losses (3)

1. netting rules generally allow deductible losses to offset gains without limit
2. Capital Loss > Capital Gain = $3,000 ded. limit for individuals
3. Special rule if Section 1244 stock (losses deductible up to $100K, gains still capital gains)


Net Operating Loss Carryback/Carryover

Carryback = 2 years
Carryover = 20 years


NOL allowed for?

Only business(including rental)/casualty losses


Hobby Expenses

Only deductible if the hobby generates revenue. 2% misc only. Excess cannot carry over.


Vacation Home Expenses

Considered rental property if:

1. rented more than 15 days
2. not used for personal more than 14 days or 10% of rented days
3. All rent taxable net of rental expenses, pro-rated for % of rental days only.
4. Loss is allowable.


Passive Activity Losses

Expenses and revenues from passive activities are netted and expenses in excess of revenue (the passive loss) are suspended.


Rental Real Estate: Passive activity loss exception

If taxpayer actively manages rental realty by owning 10% of the property and significantly participating in decision-making:

1. can deduct max loss of $25K per year
2. phased out with AGI over $100K at rate of 50% over the $100k ($1 for every $2)