Flashcards in Federal Taxation III: Deductions Deck (27):
Three mutually exclusive categories of activities/transactions
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
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
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
Limited to trips with a business purpose
Meals and lodging
Can be claimed when taxpayer is "away from home" overnight
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
Not deductible if:
1. to meet minimum standards of current job
2. to qualify taxpayer for a new trade or business
1. to maintain or improve existing skills in current job
2. to meet requirements of employer or imposed by law to retain employment
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
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.