Taxes: Limits on Business Deductions Flashcards Preview

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Flashcards in Taxes: Limits on Business Deductions Deck (5)
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1
Q

Taxes:
Limits on Business Deductions
Hobby Losses

A

Hobby Losses
- activity primarily taken for enjoyment that generates profit
- expenses deductible to extent of revenues (before 2% AGI limit)
- to avoid hobby, must prove real profit
- 2% miscellaneous itemized deductions
- no carryover
- if profit 3/5 years, IRS must prove hobby
- if losses 3/5, taxpayer must prove hobby
Order
- taxes and interest
- cash expenses
- depreciation

2
Q

Taxes:
Limits on Business Deductions
Business Use of Home

A

Business Use of Home
- deduction for home office or rental of personal residence
Requirements
- business use is exclusive and regular
- office is principal place of business OR ordinary meeting place for clients
- used for convenience of employer if taxpayer employee
- expenses allocated between part used for business and
- multiply the square footage by $5, Max 300
- same order as hobby losses
- do carry forward and can be used in future

3
Q

Taxes:
Limits on Business Deductions
Business Use of Home
Vacation Home

A

Vacation Home

  • rented less than 15 days per year = personal residence
  • 15+ days and not personal for greater of: 1) 14 days or 2) 10% days total rented then treated as rental property
    • all rent taxable net of expenses, prorated for # days
    • rental loss is allowable
  • if 15+ days and personal for greater of: 1) 14 days or 2) 10% days total rented,
    • all regular expenses, prorated for # days
    • NO rental loss is allowable
4
Q

Taxes:
Limits on Business Deductions
Passive Activity Loss Rules

A

Passive Activity Loss Rules

  • losses only offset passive income, and excess suspended
  • Definition: profit-seeking activity in which taxpayer does not materially participate in management
    • work more than 500 hours, or work more than 100 when no one else works more than 100
    • all limited partners and most rental activities
    • real estate professional must work 50% in activity and must perform 750 hours
5
Q

Taxes:
Limits on Business Deductions
Passive Activity Loss Rules
Rental Real Estate

A

Rental Real Estate

  • exception for taxpayers who actively manage rentals
  • Active Participation: own at least 10% of property and significantly participate in decision making
    • deduct max loss $25k /year
    • phaseout AGI over $100k at 50% rate until $150k
  • suspended losses are deductible in later years or when sold

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